UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 000-26497
SALEM MEDIA
GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |
77-0121400 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) | |
4880 SANTA ROSA ROAD CAMARILLO, CALIFORNIA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |
93012 (ZIP CODE) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ | Smaller Reporting Company | ¨ |
(Do not check if a Smaller Reporting Company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A | Outstanding at August 1, 2016 | |
Common Stock, $0.01 par value per share | 20,255,855 shares |
Class B | Outstanding at August 1, 2016 | |
Common Stock, $0.01 par value per share | 5,553,696 shares |
1 |
CERTAIN DEFINITIONS
Unless the context requires otherwise, all references in this report to “Salem,” or the “company,” including references to Salem by “we” “us” “our” and “its” refer to Salem Media Group, Inc. and our subsidiaries.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Salem Media Group, Inc. (“Salem” or the “company,” including references to Salem by “we,” “us” and “our”) makes “forward-looking statements” from time to time in both written reports (including this report) and oral statements, within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may,” “could,” “would,” “should” “seeks” “predicts,” or “plans” and similar expressions are intended to identify forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995.
You should not place undue reliance on these forward-looking statements, which reflect our expectations based upon data available to the company as of the date of this report. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in Salem’s reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update or revise any forward-looking statements made in this report. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by Salem about its business. These projections and other forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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PART I – FINANCIAL INFORMATION
SALEM MEDIA GROUP, INC.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SALEM MEDIA GROUP, INC. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(Dollars in thousands, except share and per share data) |
December 31, 2015 (Note 1) | June 30, 2016 (Unaudited) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 98 | $ | 44 | ||||
Trade accounts receivable (net of allowances of $13,479 in 2015 and $11,287 in 2016) | 36,029 | 33,091 | ||||||
Other receivables (net of allowances of $217 in 2015 and $110 in 2016) | 1,981 | 830 | ||||||
Inventories (net of reserves of $1,855 in 2015 and $2,161 in 2016) | 893 | 903 | ||||||
Prepaid expenses | 6,285 | 6,315 | ||||||
Deferred income taxes | 9,813 | 9,813 | ||||||
Assets held for sale | 1,700 | 1,000 | ||||||
Total current assets | 56,799 | 51,996 | ||||||
Notes receivable (net of allowances of $528 in 2015 and $607 in 2016) | 173 | 154 | ||||||
Property and equipment (net of accumulated depreciation of $162,382 in 2015 and $160,604 in 2016) | 105,483 | 104,559 | ||||||
Broadcast licenses | 393,031 | 393,566 | ||||||
Goodwill | 24,563 | 24,793 | ||||||
Other indefinite-lived intangible assets | 833 | 833 | ||||||
Amortizable intangible assets (net of accumulated amortization of $39,454 in 2015 and $41,785 in 2016) | 11,481 | 13,220 | ||||||
Deferred financing costs | 151 | 116 | ||||||
Other assets | 2,500 | 3,104 | ||||||
Total assets | $ | 595,014 | $ | 592,341 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 5,177 | $ | 3,612 | ||||
Accrued expenses | 11,301 | 10,687 | ||||||
Accrued compensation and related expenses | 8,297 | 8,272 | ||||||
Accrued interest | 16 | 47 | ||||||
Current portion of deferred revenue | 13,128 | 10,667 | ||||||
Income taxes payable | 73 | 128 | ||||||
Current portion of long-term debt and capital lease obligations | 5,662 | 4,439 | ||||||
Total current liabilities | 43,654 | 37,852 | ||||||
Long-term debt and capital lease obligations, less unamortized discount and debt issuance costs, net of current portion | 269,093 | 266,378 | ||||||
Fair value of interest rate swap | 798 | 2,979 | ||||||
Deferred income taxes | 57,082 | 59,258 | ||||||
Deferred revenue, less current portion | 13,930 | 14,903 | ||||||
Other long-term liabilities | 636 | 35 | ||||||
Total liabilities | 385,193 | 381,405 | ||||||
Commitments and contingencies (Note 16) | ||||||||
Stockholders’ Equity: | ||||||||
Class A common stock, $0.01 par value; authorized 80,000,000 shares; 22,246,134 and 22,373,577 issued and 19,928,484 and 20,055,927 outstanding at December 31, 2015 and June 30, 2016, respectively | 223 | 224 | ||||||
Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2015 and June 30, 2016, respectively | 56 | 56 | ||||||
Additional paid-in capital | 241,780 | 242,506 | ||||||
Accumulated earnings | 1,768 | 2,156 | ||||||
Treasury stock, at cost (2,317,650 shares at December 31, 2015 and June 30, 2016) | (34,006 | ) | (34,006 | ) | ||||
Total stockholders’ equity | 209,821 | 210,936 | ||||||
Total liabilities and stockholders’ equity | $ | 595,014 | $ | 592,341 |
See accompanying notes
3 |
SALEM MEDIA GROUP, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
(Dollars in thousands, except share and per share data) |
(Unaudited) |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2016 | 2015 | 2016 | |||||||||||||
Net broadcast revenue | $ | 49,060 | $ | 49,707 | $ | 95,599 | $ | 98,178 | ||||||||
Net digital media revenue | 11,499 | 11,311 | 22,290 | 22,595 | ||||||||||||
Net publishing revenue | 6,734 | 6,761 | 11,260 | 11,581 | ||||||||||||
Total net revenue | 67,293 | 67,779 | 129,149 | 132,354 | ||||||||||||
Operating expenses: | ||||||||||||||||
Broadcast operating expenses, exclusive of depreciation and amortization shown below (including $365 and $402 for the three months ended June 30, 2015 and 2016, respectively, and $730 and $810 for the six months ended June 30, 2015 and 2016, respectively, paid to related parties) | 35,187 | 35,709 | 69,104 | 71,697 | ||||||||||||
Digital media operating expenses, exclusive of depreciation and amortization shown below | 8,767 | 8,781 | 17,767 | 17,967 | ||||||||||||
Publishing operating expenses, exclusive of depreciation and amortization shown below | 6,469 | 6,983 | 10,966 | 11,931 | ||||||||||||
Unallocated corporate expenses exclusive of depreciation and amortization shown below (including $36 and $9 for the three months ended June 30, 2015 and 2016, respectively, and $69 and $107 for the six months ended June 30, 2015 and 2016, respectively, paid to related parties) | 3,518 | 3,568 | 7,509 | 7,781 | ||||||||||||
Depreciation | 3,060 | 2,982 | 6,232 | 5,974 | ||||||||||||
Amortization | 1,315 | 1,189 | 2,644 | 2,332 | ||||||||||||
Change in the estimated fair value of contingent earn-out consideration | (307 | ) | (134 | ) | (189 | ) | (262 | ) | ||||||||
Impairment of long-lived assets | — | 700 | — | 700 | ||||||||||||
(Gain) loss on the sale or disposal of assets | 30 | (1,701 | ) | 159 | (1,551 | ) | ||||||||||
Total operating expenses | 58,039 | 58,077 | 114,192 | 116,569 | ||||||||||||
Operating income | 9,254 | 9,702 | 14,957 | 15,785 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 2 | 2 | 3 | 3 | ||||||||||||
Interest expense | (3,874 | ) | (3,730 | ) | (7,678 | ) | (7,526 | ) | ||||||||
Change in the fair value of interest rate swap | 444 | (423 | ) | (976 | ) | (2,181 | ) | |||||||||
Loss on early retirement of long-term debt | — | (5 | ) | (41 | ) | (14 | ) | |||||||||
Net miscellaneous income and expenses | — | — | 7 | — | ||||||||||||
Income from operations before income taxes | 5,826 | 5,546 | 6,272 | 6,067 | ||||||||||||
Provision for income taxes | 2,303 | 2,190 | 2,454 | 2,358 | ||||||||||||
Net income | $ | 3,523 | $ | 3,356 | $ | 3,818 | $ | 3,709 | ||||||||
Basic earnings per share data: | ||||||||||||||||
Basic earnings per share | $ | 0.14 | $ | 0.13 | $ | 0.15 | $ | 0.14 | ||||||||
Diluted earnings per share data: | ||||||||||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.13 | $ | 0.15 | $ | 0.14 | ||||||||
Distributions per share | $ | 0.07 | $ | 0.13 | $ | 0.13 | $ | 0.13 | ||||||||
Basic weighted average shares outstanding | 25,429,127 | 25,551,445 | 25,387,813 | 25,518,339 | ||||||||||||
Diluted weighted average shares outstanding | 25,829,493 | 26,052,649 | 25,875,306 | 25,927,804 |
See accompanying notes
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SALEM MEDIA GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Dollars in thousands) |
(Unaudited) |
Six Months Ended June 30, | ||||||||
2015 | 2016 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 3,818 | $ | 3,709 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Non-cash stock-based compensation | 487 | 324 | ||||||
Tax benefit related to stock options exercised | 112 | 67 | ||||||
Depreciation and amortization | 8,876 | 8,306 | ||||||
Amortization of debt issuance costs | 314 | 318 | ||||||
Accretion of discount on Term Loan B | 93 | 103 | ||||||
Accretion of acquisition-related deferred payments and contingent consideration | 160 | 38 | ||||||
Provision for bad debts | 911 | 268 | ||||||
Deferred income taxes | 2,197 | 2,176 | ||||||
Change in the fair value of interest rate swap | 976 | 2,181 | ||||||
Change in the estimated fair value of contingent earn-out consideration | (189 | ) | (262 | ) | ||||
Loss on early retirement of long-term debt | 41 | 14 | ||||||
Impairment of long-lived assets | — | 700 | ||||||
(Gain) loss on the sale or disposal of assets | 159 | (1,551 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 6,315 | 7,081 | ||||||
Inventories | (272 | ) | (10 | ) | ||||
Prepaid expenses and other current assets | (1,191 | ) | (30 | ) | ||||
Accounts payable and accrued expenses | (2,674 | ) | 1,440 | |||||
Deferred revenue | (4,359 | ) | (5,209 | ) | ||||
Other liabilities | 327 | — | ||||||
Income taxes payable | (154 | ) | 55 | |||||
Net cash provided by operating activities | 15,947 | 19,718 | ||||||
INVESTING ACTIVITIES | ||||||||
Cash paid for capital expenditures net of tenant improvement allowances and non-cash transactions from trade agreements | (4,207 | ) | (5,055 | ) | ||||
Capital expenditures reimbursable under tenant improvement allowances and non-cash transactions from trade agreements | (947 | ) | (448 | ) | ||||
Escrow deposits related to acquisitions | (225 | ) | (19 | ) | ||||
Purchases of broadcast assets and radio stations | (5,186 | ) | (718 | ) | ||||
Purchases of digital media businesses and assets | (1,322 | ) | (2,803 | ) | ||||
Purchases of publishing businesses assets | — | (3 | ) | |||||
Proceeds from sale of broadcast assets | — | 2,471 | ||||||
Other | (390 | ) | (547 | ) | ||||
Net cash used in investing activities | (12,277 | ) | (7,122 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Payments under Term Loan B | (2,000 | ) | (2,750 | ) | ||||
Proceeds from borrowings under Revolver | 27,222 | 32,898 | ||||||
Payments under Revolver | (24,538 | ) | (34,433 | ) | ||||
Payments of acquisition-related contingent earn-out consideration | (1,177 | ) | (88 | ) | ||||
Payments of deferred installments on acquisitions | (935 | ) | (3,071 | ) | ||||
Proceeds from the exercise of stock options | 298 | 336 | ||||||
Payments of capital lease obligations | (58 | ) | (53 | ) | ||||
Payment of cash distributions on common stock | (3,301 | ) | (3,321 | ) | ||||
Book overdraft | 978 | (2,168 | ) | |||||
Net cash used in financing activities | (3,511 | ) | (12,650 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 159 | (54 | ) | |||||
Cash and cash equivalents at the beginning of year | 33 | 98 | ||||||
Cash and cash equivalents at end of period | $ | 192 | $ | 44 |
See accompanying notes
5 |
SALEM MEDIA GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
(Dollars in thousands) |
(Unaudited) |
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Cash paid for interest, net of capitalized interest | $ | 7,071 | $ | 7,099 | ||||
Cash paid for income taxes | $ | 316 | $ | 60 | ||||
Other supplemental disclosures of cash flow information: | ||||||||
Barter revenue | $ | 3,189 | $ | 2,475 | ||||
Barter expense | $ | 2,960 | $ | 2,441 | ||||
Non-cash investing and financing activities: | ||||||||
Capital expenditures reimbursable under tenant improvement allowances | $ | 947 | $ | 448 | ||||
Non-cash capital expenditures for property & equipment acquired under trade agreements | $ | 11 | $ | — | ||||
Estimated present value of contingent earn-out consideration | $ | 300 | $ | — | ||||
Current value of deferred cash payments (short-term) | $ | — | $ | 1,300 |
See accompanying notes
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SALEM MEDIA GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements of Salem Media Group, Inc. (“Salem,” “we,” “us,” “our” or the “company”) includes the company and all wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Information with respect to the three and six months ended June 30, 2016 and 2015 is unaudited. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the company. The unaudited interim financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Salem filed on Form 10-K for the year ended December 31, 2015. Our results are subject to seasonal fluctuations. Therefore, the results of operations for the interim periods presented are not necessarily indicative of the results of operations for the full year.
The balance sheet at December 31, 2015 included in this report has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP.
Description of Business
Salem is a domestic multi-media company with integrated operations including radio broadcasting, digital media, and publishing. Effective as of February 19, 2015, we changed our name from Salem Communications Corporation to Salem Media Group, Inc. to more accurately reflect our multi-media business. Salem was formed in 1986 as a California corporation and was reincorporated in Delaware in 1999. Our content is intended for audiences interested in Christian and family-themed programming and conservative news talk. We maintain a website at www.salemmedia.com.
We have three operating segments, (1) Broadcast, (2) Digital Media, and (3) Publishing, which are discussed in Note 17 – Segment Data. Our foundational business is the ownership and operation of radio stations in large metropolitan markets. We also own and operate Salem Radio Network® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Today’s Christian Music (“TCM”), Singing News Network (formerly Solid Gospel Network) and Salem Media RepresentativesTM (“SMR”). SRN, SNN, SMN and Singing News Network are networks that develop, produce and syndicate a broad range of programming specifically targeted to Christian and family-themed talk stations, music stations and general News Talk stations throughout the United States, including Salem-owned and operated stations. SMR, a national advertising sales firm with offices in ten U.S. cities, specializes in placing national advertising on religious and other commercial radio stations.
Web-based and digital content has been an area of growth for Salem and continues to be a focus of future development. Salem Web Network™ (“SWN”) and our other web-based businesses provide Christian and conservative-themed content, audio and video streaming, and other resources digitally through the web. SWN’s web portals include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, Jesus.org and BibleStudyTools.com. Our conservative opinion websites, collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com, HumanEvents.com and RedState.com. We also issue digital newsletters, including Eagle Financial Publications, which provide general market analysis and non-individualized investment strategies from financial commentators on a subscription basis. Church product websites including WorshipHouseMedia.com, SermonSpice.com, and ChurchStaffing.com offer downloads and service platforms to pastors and other educators. Our web content is accessible through all of our radio station websites that feature content of interest to local listeners throughout the United States.
Digital media also includes our e-commerce sites, Eagle Wellness and Gene Smart Wellness. These e-commerce sites offer health advice and nutritional products.
Our publishing operating segment is comprised of three businesses. Regnery Publishing is a traditional book publisher that has published dozens of bestselling books by leading conservative authors and personalities, including Ann Coulter, Newt Gingrich, David Limbaugh, Ed Klein, Mark Steyn and Dinesh D'Souza. Xulon Press provides self-publishing services to authors. Salem Publishing™ produces and distributes five print magazines and one digital magazine.
Variable Interest Entities
We may enter into agreements or investments with other entities that could qualify as variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation.” A VIE is consolidated in the financial statements if we are deemed to be the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE, either explicitly or implicitly. A VIE is an entity for which the primary beneficiary’s interest in the entity can change with variations in factors other than the amount of investment in the entity. We perform our evaluation for VIE’s upon entry into the agreement or investment. We re-evaluate the VIE when or if events occur that could change the status of the VIE.
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We may enter into lease arrangements with entities controlled by our principal stockholders or other related parties. We also may enter into Local Marketing Agreements (“LMAs”) or Time Brokerage Agreements (“TBAs”) contemporaneously with entering into an Asset Purchase Agreement (“APA”) to acquire or sell a radio station. Typically, both LMAs and TBAs are contractual agreements under which the station owner/licensee makes airtime available to a programmer/licensee in exchange for a fee and reimbursement of certain expenses. LMAs and TBAs are subject to compliance with the antitrust laws and the communications laws, including the requirement that the licensee must maintain independent control over the station and, in particular, its personnel, programming, and finances. The FCC has held that such agreements do not violate the communications laws as long as the licensee of the station receiving programming from another station maintains ultimate responsibility for, and control over, station operations and otherwise ensures compliance with the communications laws.
The requirements of FASB ASC Topic 810 may apply to entities under LMAs or TBAs, depending on the facts and circumstances related to each transaction. As of June 30, 2016, we did not have implicit or explicit arrangements that required consolidation under the guidance in FASB ASC Topic 810.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Significant areas for which management uses estimates include:
· | asset impairments, including goodwill, broadcasting licenses, other indefinite-lived intangible assets, and assets held for sale; |
· | probabilities associated with the potential for contingent earn-out consideration; |
· | fair value measurements; |
· | contingency reserves; |
· | allowance for doubtful accounts; |
· | sales returns and allowances; |
· | barter transactions; |
· | inventory reserves; |
· | reserves for royalty advances; |
· | fair value of equity awards; |
· | self-insurance reserves; |
· | estimated lives for tangible and intangible assets; |
· | income tax valuation allowances; and |
· | uncertain tax positions. |
These estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we may consult outside experts to assist as considered necessary.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications include the adoption of FASB Accounting Standards Update (“ASU”) 2015-03 and ASU 2015-15, which require that debt issuance costs, with the exception of costs associated with obtaining line-of-credit arrangements, be reported as a reduction of the debt liability rather than as a deferred cost asset. The adoption of ASU 2015-03 and ASU 2015-15 is reported as a change in accounting principle and discussed in detail in Note 9 – Notes Payable and Long-Term Debt.
Recent Accounting Pronouncements
Changes to accounting principles are established by the FASB in the form of ASUs to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof. Described below are ASUs that are not yet effective, but may be applicable to our financial position, results of operations, cash flows, or presentation thereof. ASUs not listed below were assessed and determined to be not applicable to our financial position, results of operations, cash flows, or presentation thereof.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses,” which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The guidance is effective in 2020 with early adoption permitted in 2019. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.
8 |
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires that lessees recognize a right-of-use asset and a lease liability for all leases with lease terms greater than twelve months in the balance sheet. ASU 2016-02 requires additional disclosures including the significant judgments made by management to provide insight into the revenue and expense to be recognized from existing contracts and the timing and uncertainty of cash flows arising from leases. The standard is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. We have not yet determined the dollar impact of recording operating leases on our statement of financial position. The adoption of ASU 2016-02 will have a material impact on our financial position and the presentation thereof. Our existing credit facility stipulates that our covenants are based on GAAP as of the agreement date. Therefore, the material impact of recording right-to-use assets and lease liabilities on our statement of financial position is not expected to impact the compliance status for any covenant.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which provides updated guidance that enhances the reporting model for financial instruments, including amendments, to address aspects of recognition, measurement, presentation and disclosure. The standard is effective for annual reporting periods beginning after December 15, 2017. With the exception of the early application guidance, early adoption of the amendments is not permitted. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position, results of operations, cash flows, or presentation thereof.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” to simplify the presentation of deferred taxes in the statement of financial position. The updated guidance requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The standard is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We have not yet evaluated the impact of the adoption of this accounting standard on our financial position or presentation thereof.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” to reduce the complexity in accounting for inventory. This ASU requires entities to measure inventory at the lower of cost or net realizable value, replacing the market value approach that required floor and ceiling considerations. This guidance for public entities is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are in the process of evaluating the adoption of this ASU, but do not expect this to have a material effect on our financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties About an Entities Ability to Continue as a Going Concern,” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures. The new standard provides management with specific guidance on the assessments and related disclosures as well as provides a longer look-forward period as one year from the financial statement issuance date. The new standard is effective for the annual period ending after December 15, 2016, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” that deferred the effective date of the new standard by one year. The new standard is now effective as of the first interim period within annual reporting periods beginning on or after December 15, 2017, and will replace most existing revenue recognition guidance in U.S. GAAP. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method and requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The FASB and the International Accounting Standards Board (“IASB”) formed a Transition Resource Group (TRG”) to discuss implementation issues and inform the IASB and the FASB of interpretive issues arising during implementation of the revenue recognition standard. The TRG does not issue guidance. The FASB has issued additional ASUs to amend or clarify select items in the original guidance. In March 2016, the FASB issued ASU 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” that clarifies principal versus agent reporting of revenue. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” that provides clarification and guidance on separately identifiable performance obligations and licenses of intellectual property. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” that provides guidance on collectability, non-cash consideration and completed contracts as of the transition date and provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. In May 2016, the FASB issued ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” that rescinds guidance issued by the Securities Exchange Commission. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer that are codified in ASC 605. We continue to evaluate the effect that this revenue guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method, nor have we determined the effect of ASU 2014-09 on our financial position, results of operations, cash flows, or presentation thereof.
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NOTE 2. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS
Approximately 71% of our total assets as of June 30, 2016 consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill and mastheads, the value of which depends significantly upon the operating results of our businesses. In the case of our radio stations, we would not be able to operate the properties without the related FCC license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal cost that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our broadcast licenses have been renewed at the end of their respective periods, and we expect that all broadcast licenses will continue to be renewed in the future. Accordingly, we consider our broadcast licenses to be indefinite-lived intangible assets in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other.” Broadcast licenses account for approximately 94% of our indefinite-lived intangible assets. Goodwill and mastheads account for the remaining 6%. We do not amortize broadcast licenses, goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired.
We complete our annual impairment tests in the fourth quarter of each year. We believe that our estimate of the value of our broadcast licenses, mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our estimates incorporate variables and assumptions that are based on past experiences and judgment about future operating performance of our markets and business segments. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs discussed in detail in Note 14. There were no indications of impairment present as of the period ending June 30, 2016.
NOTE 3. IMPAIRMENT OF LONG-LIVED ASSETS
We account for property and equipment in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” We periodically review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Our review requires us to estimate the fair value of assets when events or circumstances indicate that they may be impaired. The fair value measurements for our long-lived assets use significant observable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material.
Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. At that time we evaluated the land for impairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded the estimated fair value less costs to sell and recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price at that time. In December 2012, after several purchase offers for the land were terminated, we obtained a third-party valuation for the land. Based on the fair value determined by the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. While we continue to market the land for sale and have no intention to use the land in our operations, we have not received successful offers. Based on the amount of time that the land has been held for sale, we obtained a third-party valuation for the land as of June 2016. Based on this fair value appraisal, we recorded an additional $0.7 million impairment charge associated with the land during the three months ended June 30, 2016.
The table below presents the fair value measurements used to value this asset.
Fair Value Measurements Using: | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Description | As of June 30, 2016 | Quoted prices in active markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Gains (Losses) | |||||||||||||||
Long-Lived Asset Held for Sale | $ | 1,000 | $ | 1,000 | $ | (700 | ) |
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NOTE 4. ACQUISITIONS AND RECENT TRANSACTIONS
During the six month period ending June 30, 2016, we completed or entered into the following transactions:
Debt
On June 30, 2016, we paid $1.2 million in principal on our term loan of $300.0 million (“Term Loan B”), of which $0.4 million was an early prepayment of principal, and paid interest due as of that date. We recorded a $1,300 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $3,400 in bank loan fees associated with this principal prepayment.
On March 31, 2016, we paid the quarterly installment due of $0.8 million in principal on our Term Loan B and paid interest due as of that date.
On March 17, 2016, we paid $0.8 million in principal on our Term Loan B and paid interest due as of that date. We recorded a $2,500 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $6,700 in bank loan fees associated with this principal repayment.
Equity
On June 2, 2016, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.6 million was paid on June 30, 2016 to all Class A and Class B common stockholders of record as of June 16, 2016.
On March 10, 2016, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on April 5, 2016 to all Class A and Class B common stockholders of record as of March 22, 2016.
Related Party Transactions
On March 2, 2016, we entered into a related party lease with trusts created for the benefit of Edward G. Atsinger III, Chief Executive Officer, and Stuart W. Epperson, Chairman of the Board. The lease is for real property used to operate radio station KNUS-AM in Denver, Colorado. Our Nominating and Corporate Governance Committee reviewed the lease and lease terms and determined that the terms of the transaction were no less favorable to Salem than those that would be available in a comparable transaction in arm’s length dealings with an unrelated third party.
Acquisitions – Broadcast
The FCC permits AM and FM radio stations to operate FM Translators, or low power secondary stations that retransmit the programming of a radio station to portions of the station’s service area that the primary signal does not reach because of distance or terrain barriers. The FCC began an AM Revitalization program, or “AMR,” that included several initiatives intended to benefit AM broadcasters. One of these benefits, intended to promote the use of FM Translators by AM broadcasters, allows an AM station to relocate one FM translator up to 250 miles from its authorized site and operate the translator on any non-reserved band FM channel in the AM station’s market, subject to coverage and interference rules.
On January 29, 2016, the FCC opened a one-time only filing window during which only Class C and Class D AM broadcast stations could participate. This window closed on July 28, 2016. A second window opened on July 29, 2016, allowing Class A and Class B AM broadcast stations to participate. The second window will close on October 31, 2016. During these filing windows, qualifying AM licensees may apply for one new FM translator station, in the non-reserved FM band to be used solely to re-broadcast the AM licensee’s AM signal to provide fill-in and/or nighttime service. The FM translator must rebroadcast the related AM station for at least four years, not counting any periods of silence.
We entered into several agreements to acquire FM Translators or FM Translators construction permits during this first window. Construction permits provide the station the authority to construct a new FM Translator or make changes in the existing facilities. We believe that securing these FM Translators allows us to increase our audience by providing enhanced coverage and reach of our existing AM broadcasts.
Our acquisitions include the following:
On June 20, 2016, we closed on the acquisition of an FM Translator used in our Columbus, Ohio market for $0.3 million in cash.
On June 10, 2016, we closed on the acquisition of an FM Translator in Amherst, New York for $60,000 in cash. The translator is used in our Pittsburgh, Pennsylvania market.
On June 8, 2016, we closed on the acquisition of a construction permit for an FM Translator construction permit in Charlotte, Michigan for $50,000 in cash. The translator will be used in our Detroit, Michigan market and is reflected in projects-in-process at June 30, 2016.
On June 3, 2016, we closed on the acquisition of a construction permit for an FM Translator in Atwood, Kentucky for $88,000 in cash. The translator will be used in our Columbus, Ohio market and is reflected in projects-in-process at June 30, 2016.
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On May 13, 2016, we closed on the acquisition of a construction permit for an FM Translator in Kerrville, Texas for $50,000 in
cash. The translator will be used in our Houston, Texas market and is reflected in projects-in-process at June 30, 2016.
On May 2, 2016, we closed on the acquisition of an FM Translator in Lincoln, Maine for $100,000 in cash. The translator is used in our Boston, Massachusetts market.
On April 29, 2016, we closed on the acquisition of a construction permit for an FM Translator in Emporia, Kansas for $25,000 in cash. The translator will be relocated to Omaha, Nebraska, for use by our KCRO-AM radio station and is reflected in projects-in-process at June 30, 2016.
Acquisitions – Digital Media
On April 1, 2016, we acquired the Retirement Watch newsletter and websites for $0.1 million in cash and the assumption of $0.6 million in deferred subscription liabilities. Retirement Watch offers research and strategies associated with retirement planning. We recorded goodwill of approximately $8,600 associated with the expected synergies to be realized upon combining the operations of Retirement Watch into our digital media platform and brand loyalty from its existing subscriber base that is not a separately identifiable intangible asset.
On March 8, 2016, we acquired King James Bible mobile applications for $4.0 million, of which $2.7 million was paid in cash upon close and $1.3 million is due in deferred installments within one year from the closing date. The deferred installments were amended on May 17, 2016 to include the $0.3 million that was due upon finalization of banking arrangements with the deferred installments. The amended deferred payments of $1.3 million now consist of $0.6 million due within 90 days, $0.3 million due within 180 days and two deferred payments of $0.2 million each due 270 and 360 days from the closing date, respectively. As of the date of this filing, we have paid the first installment of $0.6 million. We recorded goodwill of $0.2 million associated with the expected synergies to be realized from combining the operations of these applications into our existing digital media platform. The accompanying condensed consolidated statement of operations reflects the operating results of King James Bible mobile applications as of the closing date within our digital media operating segment.
Acquisitions – Publishing
Throughout the six month period ending June 30, 2016, we acquired domain names and other assets associated within our publishing operating segment for approximately $6,000 in cash.
A summary of our business acquisitions and asset purchases during the six month period ended June 30, 2016, none of which were individually or in the aggregate material to our Condensed Consolidated financial position as of the respective date of acquisition, is as follows:
Acquisition Date | Description | Total Cost | ||||
(Dollars in thousands) | ||||||
June 20, 2016 | FM Translator, Columbus, Ohio (asset purchase) | $ | 345 | |||
June 10, 2016 | FM Translator, Amherst, New York (asset purchase) | 60 | ||||
June 8, 2016 | FM Translator construction permit, Charlotte, Michigan (asset purchase) | 50 | ||||
June 3, 2016 | FM Translator construction permit, Atwood, Kentucky (asset purchase) | 88 | ||||
May 13, 2016 | FM Translator construction permit, Kerrville, Texas (asset purchase) | 50 | ||||
May 2, 2016 | FM Translator, Lincoln, Maine (asset purchase) | 100 | ||||
April 29, 2016 | FM Translator construction permit, Emporia, Kansas (asset purchase) | 25 | ||||
April 1, 2016 | Retirement Watch (business acquisition) | 100 | ||||
March 8, 2016 | King James Bible mobile applications (business acquisition) | 4,000 | ||||
Various | Purchase of domain names and assets for use in publishing business (asset purchases) | 6 | ||||
$ | 4,824 |
The operating results of our business acquisitions and asset purchases are included in our condensed consolidated results of operations from their respective closing date or the date that we began operating them under an LMA or TBA. Under the acquisition method of accounting as specified in FASB ASC Topic 805, “Business Combinations,” the total acquisition consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction.
Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives based on historical experience, market trends and any synergies believed to be achieved from the acquisition. Acquisitions may include contingent consideration, the fair value of which is estimated as of the acquisition date as the present value of the expected contingent payments as determined using weighted probabilities of the payment amounts. We may retain a third-party appraiser to estimate the fair value of the acquired net assets as of the acquisition date. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values to the various asset categories in our financial statements. These fair value estimates are subjective in nature and require careful consideration and judgment. Management reviews the third party reports for reasonableness of the assigned values.
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We believe that these valuations and analysis provide appropriate estimates of the fair value for the net assets acquired as of the acquisition date. These initial valuations are subject to refinement during the measurement period, which may be up to one year from the acquisition date. During this measurement period we may retroactively record adjustments to the net assets acquired based on additional information obtained for items that existed as of the acquisition date. Upon the conclusion of the measurement period any adjustments are reflected in our consolidated statements of operations. We have not to date recorded adjustments to our estimated fair values used in our acquisition consideration during or after the measurement period.
Property and equipment are recorded at the estimated fair value and depreciated on a straight-line basis over their estimated useful lives. Finite-lived intangible assets are recorded at their estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which represents the organizational systems and procedures in place to ensure the effective operation of the entity, may also be recorded and tested for impairment. Costs associated with acquisitions, such as consulting and legal fees, are expensed as incurred in corporate operating expenses. We recognized total costs associated with acquisitions of $0.1 million during the six month period ending June 30, 2016 compared to $0.2 million during the same period of the prior year, which are included in unallocated corporate expenses in the accompanying condensed consolidated statements of operations.
The total acquisition consideration is equal to the sum of all cash payments, the fair value of any deferred payments and promissory notes, and the present value of any estimated contingent earn-out consideration. We estimate the fair value of contingent earn-out consideration using a probability-weighted discounted cash flow model. The fair value measurement is based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Note 14 - Fair Value Measurements.
The following table summarizes the total acquisition consideration for the six month period ending June 30, 2016:
Description | Total Consideration | |||
(Dollars in thousands) | ||||
Cash payments made upon closing | $ | 3,524 | ||
Deferred payments | 1,300 | |||
Total purchase price consideration | $ | 4,824 |
The total acquisition consideration was allocated to the net assets acquired as follows:
Net Broadcast | Net Digital Media | Net Publishing | Net Total | |||||||||||||
Assets Acquired | Assets Acquired | Assets Acquired | Assets Acquired | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets | ||||||||||||||||
Property and equipment | $ | 13 | $ | 371 | $ | — | $ | 384 | ||||||||
Projects in process | 213 | — | 213 | |||||||||||||
Broadcast licenses | 492 | — | — | 492 | ||||||||||||
Goodwill | — | 230 | — | 230 | ||||||||||||
Domain and brand names | — | 908 | 6 | 914 | ||||||||||||
Customer lists and contracts | — | 2,867 | — | 2,867 | ||||||||||||
Non-compete agreements | — | 289 | — | 289 | ||||||||||||
Liabilities | ||||||||||||||||
Deferred revenue | — | (565 | ) | — | (565 | ) | ||||||||||
$ | 718 | $ | 4,100 | $ | 6 | $ | 4,824 |
Divestitures
On June 10, 2016, we received $2.5 million in cash from the National Park Service in exchange for its claim under eminent domain for our tower site in Miami, Florida. We recognized a pre-tax gain of $1.9 million from this sale. We entered into a limited terms of use agreement with the National Park Service to broadcast from the tower site for the next twenty years for a nominal fee.
Pending Transaction
On June 24, 2016, we entered into an LMA to operate radio station KTRB-AM in San Francisco, California beginning on July 1, 2016. We paid a security deposit of $55,000 in cash on June 27, 2016.
On June 15, 2016, we entered into an APA to acquire an FM Translator in Sebring, Florida for $77,000 in cash. This translator will be used by our WKAT-AM radio station in Miami, Florida. The transaction is expected to close in the third quarter of 2016.
On June 2, 2016, we entered into an APA to acquire an FM Translator in Lake Placid, Florida for $35,000 in cash. This translator will be used by our WTLN-AM radio station in Orlando, Florida. The transaction is expected to close in the third quarter of 2016.
On May 25, 2016, we entered into an APA to acquire an FM Translator in Lake City, Florida for $65,000 in cash from a related party. This translator will be used by our WBZQ-AM radio station in Orlando, Florida. The transaction is expected to close in the third quarter of 2016.
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On May 18, 2016, we entered into an APA to acquire a construction permit for an FM Translator in Palm Coast, Florida for $65,000 in cash from a related party. This translator will be used by our WTWD-AM radio station in Tampa, Florida. The transaction is expected to close in the third quarter of 2016.
We are programming radio station KHTE-FM, Little Rock, Arkansas, under a 36 month TBA that began on April 1, 2015. The TBA is extendable for up to 48 months. We have the option to acquire the station for $1.2 million in cash during the TBA period. The accompanying condensed consolidated statements of operations included in this quarterly report on Form 10-Q reflect the operating results of this entity as of the TBA date.
NOTE 5. CONTINGENT EARN-OUT CONSIDERATION
Our acquisitions may include contingent earn-out consideration as part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments to be made using a probability-weighted discounted cash flow model for probabilities of possible future payments. The present value of the expected future payouts is accreted to interest expense over the earn-out period. The fair value estimates use significant unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs discussed in detail in Note 14.
We review the probabilities of possible future payments to the estimated fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.
Daily Bible Devotion
We acquired Daily Bible Devotion mobile applications on May 6, 2015. We paid $1.1 million in cash upon closing and may pay up to an additional $0.3 million in contingent earn-out consideration payable over the next two years based upon on the achievement of cumulative session benchmarks for each mobile application. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of Bible Devotional Applications to achieve the session benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $165,000, which was recorded at the discounted present value of $142,000. The discount is being accreted to interest expense over the two-year earn-out period. We believe that our experience with digital mobile applications and websites provides a reasonable basis for our estimates.
We review the fair value of the contingent earn-out consideration quarterly over the two-year earn-out period to compare actual cumulative sessions achieved to the estimated cumulative sessions used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract, or $0.3 million less amounts paid or expired to date. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. During the six month period ending June 30, 2016, we paid a total of $75,000 to the seller as contingent earn-out consideration for achieving benchmarks during the earn-out period to date, which was less than our original estimates. Due to declines in the cumulative sessions achieved during the six month period ending June 30, 2016, we recorded a net decrease of $93,000 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for this period.
Bryan Perry Newsletters
On February 6, 2015, we acquired the assets and assumed the deferred subscription liabilities for Bryan Perry Newsletters, paying no cash to the seller upon closing. Future contingent earn-out consideration due to the seller is based upon net subscriber revenues achieved over a two-year period from date of close, of which we will pay the seller 50%. There is no minimum or maximum contractual amount due. Using a probability-weighted discounted cash flow model based on our revenue projections at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $171,000, which we recorded at the discounted present value of $158,000. The discount is being accreted to interest expense over the two-year earn-out period. We believe that our experience with digital publications and renewals provides a reasonable basis for our estimates.
We review the fair value of the contingent earn-out consideration quarterly over the two year earn-out period to compare actual subscription revenue earned to the estimated subscription revenue used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period they are identified. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. During the six month period ending June 30, 2016, we paid a total of $13,000 to the seller as contingent earn-out consideration for amounts earned, which was less than our original estimates. Due to declines in the number of subscriptions renewed during the six month period ending June 30, 2016, we recorded a net decrease of $13,000 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for this period.
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Eagle Publishing
On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. The base purchase price was $8.5 million, with $3.5 million paid in cash upon closing, and deferred payments of $2.5 million each due January 2015 and January 2016. As part of the purchase agreement, we may pay up to an additional $8.5 million of contingent earn-out consideration during the three year period from the closing date based upon the achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. Using a probability-weighted discounted cash flow model based on the likelihood of achievement of the benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $2.4 million, which was recorded at the discounted present value of $2.0 million. We have paid $0.6 million to date and have one contingent earn-out period remaining through January 10, 2017. The discount is being accreted to interest expense over the three-year earn-out period. We believe that our experience with publications, renewal rates and websites provide a reasonable basis for our estimates.
We review the fair value of the contingent earn-out consideration quarterly over the three year earn-out period to compare actual operating revenues earned to the estimated revenue used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract, or $8.5 million less amounts paid or expired to date. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. During the six month period ending June 30, 2016, no payments were made to the seller for amounts earned under the contingent earn-out consideration, which was less than our original estimates. Based on actual revenues for the period ending June 30, 2016 that were below those used in our prior estimates, we recorded a net decrease in the estimated fair value of the contingent earn-out consideration of $156,000 that is reflected in our results of operations for this period.
The following table reflects the changes in the present value of our acquisition-related estimated contingent earn-out consideration during the three and six month period ending June 30, 2016 and 2015:
Three Months Ending June 30, 2016 | ||||||||||||
Short-Term | Long-Term | |||||||||||
Accrued Expenses | Other Liabilities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning Balance as of April 1, 2016 | $ | 541 | $ | 33 | $ | 574 | ||||||
Acquisitions | — | — | — | |||||||||
Accretion of acquisition-related contingent earn-out consideration | 5 | 1 | 6 | |||||||||
Change in the estimated fair value of contingent earn-out consideration | (134 | ) | — | (134 | ) | |||||||
Reclassification of payments due in next 12 months to short-term | 34 | (34 | ) | — | ||||||||
Payments | (5 | ) | — | (5 | ) | |||||||
Ending Balance as of June 30, 2016 | $ | 441 | $ | — | $ | 441 |
Three Months Ending June 30, 2015 | ||||||||||||
Short-Term Accrued Expenses | Long-Term Other Liabilities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning Balance as of April 1, 2015 | $ | 2,251 | $ | 1,035 | $ | 3,286 | ||||||
Acquisitions | 88 | 54 | 142 | |||||||||
Accretion of acquisition-related contingent earn-out consideration | 21 | 11 | 32 | |||||||||
Change in the estimated fair value of contingent earn-out consideration | (293 | ) | (14 | ) | (307 | ) | ||||||
Reclassification of payments due in next 12 months to short-term | — | — | — | |||||||||
Payments | (877 | ) | — | (877 | ) | |||||||
Ending Balance as of June 30, 2015 | $ | 1,190 | $ | 1,086 | $ | 2,276 |
Six Months Ending June 30, 2016 | ||||||||||||
Short-Term | Long-Term | |||||||||||
Accrued Expenses | Other Liabilities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning Balance as of January 1, 2016 | $ | 173 | $ | 602 | $ | 775 | ||||||
Acquisitions | — | — | — | |||||||||
Accretion of acquisition-related contingent earn-out consideration | 8 | 8 | 16 | |||||||||
Change in the estimated fair value of contingent earn-out consideration | (208 | ) | (54 | ) | (262 | ) | ||||||
Reclassification of payments due in next 12 months to short-term | 556 | (556 | ) | — | ||||||||
Payments | (88 | ) | — | (88 | ) | |||||||
Ending Balance as of June 30, 2016 | $ | 441 | $ | — | $ | 441 |
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Six Months Ending June 30, 2015 | ||||||||||||
Short-Term Accrued Expenses | Long-Term Other Liabilities | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Beginning Balance as of January 1, 2015 | $ | 1,575 | $ | 1,710 | $ | 3,285 | ||||||
Acquisitions | 176 | 124 | 300 | |||||||||
Accretion of acquisition-related contingent earn-out consideration | 31 | 26 | 57 | |||||||||
Change in the estimated fair value of contingent earn-out consideration | (213 | ) | 24 | (189 | ) | |||||||
Reclassification of payments due in next 12 months to short-term | 798 | (798 | ) | — | ||||||||
Payments | (1,177 | ) | — | (1,177 | ) | |||||||
Ending Balance as of June 30, 2015 | $ | 1,190 | $ | 1,086 | $ | 2,276 |
NOTE 6. INVENTORIES
Inventories consist of finished goods including books from Regnery Publishing and wellness products. All inventories are valued at the lower of cost or market as determined on a First-In First-Out (“FIFO”) cost method and reported net of estimated reserves for obsolescence.
The following table provides details of inventory on hand by segment:
December 31, 2015 | June 30, 2016 | |||||||
(Dollars in thousands) | ||||||||
Regnery Publishing book inventories | $ | 2,186 | $ | 2,612 | ||||
Reserve for obsolescence – Regnery Publishing | (1,798 | ) | (2,097 | ) | ||||
Inventory net, Regnery Publishing | 388 | 515 | ||||||
Wellness products | $ | 562 | $ | 452 | ||||
Reserve for obsolescence – Wellness products | (57 | ) | (64 | ) | ||||
Inventory, net Wellness products | 505 | 388 | ||||||
Consolidated inventories, net | $ | 893 | $ | 903 |
NOTE 7. PROPERTY AND EQUIPMENT
The following is a summary of the categories of our property and equipment:
December 31, 2015 | June 30, 2016 | |||||||
(Dollars in thousands) | ||||||||
Land | $ | 31,565 | $ | 31,180 | ||||
Buildings | 25,448 | 25,362 | ||||||
Office furnishings and equipment | 38,812 | 36,798 | ||||||
Office furnishings and equipment under capital lease obligations | 228 | 228 | ||||||
Antennae, towers and transmitting equipment | 83,501 | 83,120 | ||||||
Antennae, towers and transmitting equipment under capital lease obligations | 795 | 795 | ||||||
Studio, production and mobile equipment | 30,598 | 28,277 | ||||||
Computer software and website development costs | 28,134 | 28,423 | ||||||
Record and tape libraries | 55 | 28 | ||||||
Automobiles | 1,298 | 1,326 | ||||||
Leasehold improvements | 20,799 | 19,713 | ||||||
Construction-in-progress | 6,632 | 9,913 | ||||||
$ | 267,865 | $ | 265,163 | |||||
Less accumulated depreciation | (162,382 | ) | (160,604 | ) | ||||
$ | 105,483 | $ | 104,559 |
Depreciation expense was approximately $3.0 million for each of the three month periods ending June 30, 2015 and 2016, and $6.2 million and $6.0 million for the six month period ending June 30, 2015 and 2016, respectively. Included in these amounts is depreciation of $24,000 for each of the three month periods and $48,000 for each of the six month periods related to assets held under capital lease obligations. Accumulated depreciation associated with assets under capital lease obligations was $615,000 and $566,000 at June 30, 2016 and December 31, 2015, respectively.
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NOTE 8. AMORTIZABLE INTANGIBLE ASSETS
The following tables provide details, by major category, of the significant classes of amortizable intangible assets:
June 30, 2016 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Customer lists and contracts | $ | 22,403 | $ | (19,522 | ) | $ | 2,881 | |||||
Domain and brand names | 17,533 | (11,993 | ) | 5,540 | ||||||||
Favorable and assigned leases | 2,379 | (1,932 | ) | 447 | ||||||||
Subscriber base and lists | 7,786 | (4,540 | ) | 3,246 | ||||||||
Author relationships | 2,245 | (1,595 | ) | 650 | ||||||||
Non-compete agreements | 1,323 | (867 | ) | 456 | ||||||||
Other amortizable intangible assets | 1,336 | (1,336 | ) | — | ||||||||
$ | 55,005 | $ | (41,785 | ) | $ | 13,220 |
December 31, 2015 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Customer lists and contracts | $ | 20,009 | $ | (18,914 | ) | $ | 1,095 | |||||
Domain and brand names | 16,619 | (11,200 | ) | 5,419 | ||||||||
Favorable and assigned leases | 2,379 | (1,887 | ) | 492 | ||||||||
Subscriber base and lists | 7,313 | (3,808 | ) | 3,505 | ||||||||
Author relationships | 2,245 | (1,523 | ) | 722 | ||||||||
Non-compete agreements | 1,034 | (786 | ) | 248 | ||||||||
Other amortizable intangible assets | 1,336 | (1,336 | ) | — | ||||||||
$ | 50,935 | $ | (39,454 | ) | $ | 11,481 |
Based on the amortizable intangible assets as of June 30, 2016, we estimate amortization expense for the next five years to be as follows:
Year Ending December 31, | Amortization Expense | |||
(Dollars in thousands) | ||||
2016 (July – Dec) | $ | 2,314 | ||
2017 | 3,414 | |||
2018 | 3,171 | |||
2019 | 2,659 | |||
2020 | 1,359 | |||
Thereafter | 303 | |||
Total | $ | 13,220 |
NOTE 9. NOTES PAYABLE AND LONG-TERM DEBT
Salem Media Group, Inc. has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of Salem Media Group, Inc. other than the subsidiary guarantors are minor.
Term Loan B and Revolving Credit Facility
On March 14, 2013, we entered into a senior secured credit facility, consisting of the Term Loan B of $300.0 million and $25.0 million Revolver. The Term Loan B was issued at a discount for total net proceeds of $298.5 million. The discount is being amortized to non-cash interest expense over the life of the loan using the effective interest method. For each of the three and six months ended June 30, 2015 and 2016, approximately $47,000 and $93,000, respectively, and $52,000 and $104,000, respectively, of the discount has been recognized as interest expense.
The Term Loan B has a term of seven years, maturing in March 2020. During this term, the principal amount may be increased by up to an additional $60.0 million, subject to the terms and conditions of the credit agreement. We are required to make principal payments of $750,000 per quarter as of September 30, 2013. Prepayments may be made against the outstanding balance of our Term Loan B with each prepayment applied ratably to each of the next four principal installments due within 12 months of the prepayment date in the direct order of maturity and thereafter to the remaining principal balance in reverse order of maturity.
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We made the following payments or prepayments of our Term Loan B during the year ended December 31, 2015 and six month period ending June 30, 2016, including interest through the payment date as follows:
Date | Principal Paid | Unamortized Discount | ||||||
(Dollars in thousands) | ||||||||
June 30, 2016 | $ | 441 | $ | 1 | ||||
June 30, 2016 | 750 | — | ||||||
March 31, 2016 | 750 | — | ||||||
March 17, 2016 | 809 | 2 | ||||||
January 30, 2015 | 2,000 | 15 |
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” that requires the cost of issuing debt to be recorded as a reduction of the debt proceeds or a reduction of the debt liability, similar to the presentation of debt discounts. Prior to this ASU, debt issue costs were recorded as deferred costs, or long-term intangible assets. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” that amended ASU 2015-03 to reflect the SEC staff’s position that it would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings under that line-of-credit arrangement.
We adopted ASU 2015-03, as amended by ASU 2015-15, as of the effective date, or fiscal years beginning after December 31, 2015. We chose to continue presentation of debt issue costs associated with our Revolver as an asset in accordance with ASU 2015-15. We have retrospectively accounted for the implementation of ASU 2015-03 and ASU 2015-15 as a change in accounting principle. We have reclassified debt issue costs reported on our December 31, 2015 consolidated balance sheet as follows:
December 31, 2015 | ||||||||
(Dollars in thousands) | ||||||||
As Reported | As Updated ASU 2015-03 | |||||||
Balance Sheet Line Items: | ||||||||
Term Loan B | $ | 273,136 | $ | 274,000 | ||||
Less: Unamortized discount based on imputed interest rate of 4.78% | — | (864 | ) | |||||
Less: Unamortized debt issuance costs based on imputed interest rate of 4.78% | — | (2,361 | ) | |||||
Term Loan B net carrying value | 273,136 | 270,775 | ||||||
Revolver | 3,306 | 3,306 | ||||||
Capital leases and other loans | 674 | 674 | ||||||
$ | 277,116 | $ | 274,755 | |||||
Less current portion | (5,662 | ) | (5,662 | ) | ||||
Long-term debt and capital lease obligations less unamortized discount and debt issuance costs, net of current portion | $ | 271,454 | $ | 269,093 | ||||
Deferred financing costs | $ | 2,512 | $ | 151 |
Debt issue costs are being amortized to non-cash interest expense over the life of the Term Loan B using the effective interest method. For each of the three months ended June 30, 2015 and 2016, approximately $139,000 and $141,000, respectively, of the debt issue costs associated with the Term Loan B were recognized as interest expense. For each of the six months ended June 30, 2015 and 2016, approximately $279,000 and $283,000, respectively, of the debt issue costs associated with the Term Loan B were recognized as interest expense.
We chose to continue the presentation of debt issue costs associated with our Revolver as an asset in accordance with ASU 2015-15. These costs are being amortized to non-cash interest expense over the five year life of the Revolver using the effective interest method based on an imputed interest rate of 4.58%. During each of the three and six month periods ending June 30, 2015 and 2016, we recorded amortization of deferred financing costs of approximately $17,000 each and $35,000 each.
The Revolver has a term of five years, maturing in March 2018. We report outstanding balances on our Revolver as short-term based on use of the Revolver to fund ordinary and customary operating cash needs with repayments made frequently. We believe that the borrowing capacity under our Term Loan B and Revolver allows us to meet our ongoing operating requirements, fund capital expenditures and satisfy our debt service requirements for at least the next twelve months.
Borrowings under the Term Loan B may be made at LIBOR (subject to a floor of 1.00%) plus a spread of 3.50% or Wells Fargo Bank, National Association’s (“Wells Fargo”) base rate plus a spread of 2.50%. Borrowings under the Revolver may be made at LIBOR or Wells Fargo’s base rate plus a spread determined by reference to our leverage ratio, as set forth in the pricing grid below. If an event of default occurs under the credit agreement, the applicable interest rate may increase by 2.00% per annum. At June 30, 2016, the blended interest rate on amounts outstanding under the Term Loan B and Revolver was 4.51%.
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Revolver Pricing | ||||||||||
Pricing Level | Consolidated Leverage Ratio | Base Rate Loans | LIBOR Loans | |||||||
1 | Less than 3.00 to 1.00 | 1.250 | % | 2.250 | % | |||||
2 | Greater than or equal to 3.00 to 1.00 but less than 4.00 to 1.00 | 1.500 | % | 2.500 | % | |||||
3 | Greater than or equal to 4.00 to 1.00 but less than 5.00 to 1.00 | 1.750 | % | 2.750 | % | |||||
4 | Greater than or equal to 5.00 to 1.00 but less than 6.00 to 1.00 | 2.000 | % | 3.000 | % | |||||
5 | Greater than or equal to 6.00 to 1.00 | 2.500 | % | 3.500 | % |
The obligations under the credit agreement and the related loan documents are secured by liens on substantially all of the assets of Salem and its subsidiaries, other than certain exceptions set forth in the Security Agreement, dated as of March 14, 2013, among Salem, the subsidiary guarantors party thereto, and Wells Fargo, as Administrative Agent (the “Security Agreement”) and such other related loan documents.
With respect to financial covenants, the credit agreement includes a minimum interest coverage ratio, which started at 1.50 to 1.0 and stepped up to 2.50 to 1.0 and a maximum leverage ratio, which started at 6.75 to 1.0 and steps down to 5.75 to 1.0 by 2017. The credit agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the credit agreement, restrict the ability of Salem and its subsidiary guarantors: (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens; (v) to sell assets; (vi) to enter into transactions with affiliates; or (vii) to merge or consolidate with, or dispose of all or substantially all assets to, a third party. As of June 30, 2016, our leverage ratio was 5.39 to 1 compared to our compliance covenant of 6.00 and our interest coverage ratio was 3.33 compared to our compliance ratio of 2.50. We were in compliance with our debt covenants under the credit facility at June 30, 2016.
Other Debt
We have several capital leases related to office equipment. The obligation recorded at December 31, 2015 and June 30, 2016 represents the present value of future commitments under the capital lease agreements.
Summary of long-term debt obligations
Long-term debt consisted of the following:
December 31, 2015 | June 30, 2016 | |||||||||
(Dollars in thousands) | ||||||||||
Term Loan B principal amount | $ | 274,000 | $ | 271,250 | ||||||
Less unamortized discount and debt issuance costs based on imputed interest rate of 4.78% | (3,225 | ) | (2,825 | ) | ||||||
Term Loan B net carrying value | 270,775 | 268,425 | ||||||||
Revolver | 3,306 | 1,770 | ||||||||
Capital leases and other loans | 674 | 622 | ||||||||
274,755 | 270,817 | |||||||||
Less current portion | (5,662 | ) | (4,439 | ) | ||||||
$ | 269,093 | $ | 266,378 |
In addition to the outstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of June 30, 2016:
· | Outstanding borrowings of $271.2 million under the Term Loan B with interest payments due at LIBOR (subject to a floor of 1.00%) plus 3.50% or prime rate plus 2.50%; and |
· | Outstanding borrowings of $1.8 million under the Revolver, with interest payments due at LIBOR plus 3.00% or at prime rate plus 2.00%. |
· | Commitment fees of 0.50% on any unused portion of the revolver. |
Maturities of Long-Term Debt and Capital Lease Obligations
Principal repayment requirements under all long-term debt agreements and capital lease obligations outstanding at June 30, 2016 for each of the next five years and thereafter are as follows:
Amount | ||||
For the Twelve Months Ended June 30, | (Dollars in thousands) | |||
2017 | $ | 4,439 | ||
2018 | 3,112 | |||
2019 | 3,102 | |||
2020 | 259,969 | |||
2021 | 113 | |||
Thereafter | 82 | |||
$ | 270,817 |
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NOTE 10. STOCK INCENTIVE PLAN
The company has one stock incentive plan. The Amended and Restated 1999 Stock Incentive Plan (the “Plan”) allows the company to grant stock options and restricted stock to employees, directors, officers and advisors of the company. A maximum of 5,000,000 shares are authorized under the Plan. Options generally vest over a four-year period and have a maximum term of five years from the vesting date. The Plan provides that vesting may be accelerated upon the occurrence of certain corporate transactions of the company. The Plan provides that the Board of Directors, or a committee appointed by the Board, has discretion, subject to certain limits, to modify the terms of outstanding options. We recognize non-cash stock-based compensation expense related to the estimated fair value of stock options granted in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.”
The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2016:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2016 | 2015 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Stock option compensation expense included in corporate expenses | $ | 88 | $ | 81 | $ | 316 | $ | 202 | ||||||||
Restricted stock awards compensation expense included in corporate expenses | 14 | — | 15 | 24 | ||||||||||||
Stock option compensation expense included in broadcast operating expenses | 25 | 20 | 77 | 48 | ||||||||||||
Stock option compensation expense included in digital media operating expenses | 19 | 14 | 55 | 39 | ||||||||||||
Stock option compensation expense included in publishing operating expenses | 10 | 10 | 24 | 11 | ||||||||||||
Total stock-based compensation expense, pre-tax | $ | 156 | $ | 125 | $ | 487 | $ | 324 | ||||||||
Tax provision for stock-based compensation expense | (63 | ) | (50 | ) | (195 | ) | (130 | ) | ||||||||
Total stock-based compensation expense, net of tax | $ | 93 | $ | 75 | $ | 292 | $ | 194 |
Stock option and restricted stock grants
The Plan allows the company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the company. For grants of stock options, the option exercise price is set at the closing price of the company’s common stock on the date of grant, and the related number of shares underlying the stock option is fixed at that point in time. The Plan also provides for grants of restricted stock. Eligible employees may receive stock options annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive a stock option grant upon commencement of employment. The Plan does not allow key employees and directors (restricted persons) to exercise options during pre-defined blackout periods. Employees may participate in plans established pursuant to Rule 10b5-1 under the Exchange Act that allow them to exercise options according to pre-established criteria.
We use the Black-Scholes valuation model to estimate the grant date fair value of stock options and restricted stock. The expected volatility reflects the consideration of the historical volatility of our stock as determined by the closing price over a six to ten year term that is generally commensurate with the expected term of the award. Expected dividends reflect the quarterly distributions authorized and declared on our Class A and Class B common stock as of the grant date. The expected term of the awards are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rates for periods within the expected term of the award are based on the U.S. Treasury yield curve in effect during the period the options were granted. We use historical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the valuation model.
The weighted-average assumptions used to estimate the fair value of the stock options and restricted stock awards using the Black-Scholes valuation model were as follows for the three and six months ended June 30, 2015 and 2016:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2016 | 2015 | 2016 | |||||||||||||
Expected volatility | n/a | 46.77 | % | 52.37 | % | 47.03 | % | |||||||||
Expected dividends | n/a | 4.08 | % | 4.28 | % | 5.36 | % | |||||||||
Expected term (in years) | n/a | 6.0 | 3.0 | 7.5 | ||||||||||||
Risk-free interest rate | n/a | 1.38 | % | 0.85 | % | 1.66 | % |
Stock option information with respect to the company’s stock-based equity plans during the six months ended June 30, 2016 is as follows:
Options | Shares | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
(Dollars in thousands, except weighted average exercise price and weighted average grant date fair value) | ||||||||||||||||||
Outstanding at January 1, 2016 | 1,581,123 | $ | 4.87 | $ | 3.39 | 4.3 years | $ | 1,738 | ||||||||||
Granted | 549,500 | 4.85 | 1.33 | |||||||||||||||
Exercised | (117,443 | ) | 2.85 | 1.85 | ||||||||||||||
Forfeited or expired | (70,377 | ) | 8.01 | 5.91 | ||||||||||||||
Outstanding at June 30, 2016 | 1,942,803 | $ | 4.88 | $ | 2.81 | 4.9 years | $ | 4,585 | ||||||||||
Exercisable at June 30, 2016 | 1,062,178 | $ | 5.03 | $ | 3.56 | 3.4 years | $ | 2,342 | ||||||||||
Expected to Vest | 836,164 | $ | 4.69 | $ | 1.89 | 6.6 years | $ | 2,130 |
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Non-employee directors of the company have been awarded restricted stock awards that vest one year from the date of issuance. These restricted stock awards contained transfer restrictions under which they could not be sold, pledged, transferred or assigned until the sooner of the fifth anniversary from the grant date or the day after the non-employee director is no longer a member of the company’s board. The restricted stock awards are independent of option grants and were granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards were considered issued and outstanding from the date of grant.
The fair values of shares of restricted stock awards are determined based on the closing price of the company common stock on the grant dates. Information regarding the company’s restricted stock awards during the six months ended June 30, 2016 is as follows:
Restricted Stock Awards | Shares | Weighted Average Grant Date Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
(Dollars in thousands, except weighted average exercise price and weighted average grant date fair value) | ||||||||||||||||
Outstanding at January 1, 2016 | 8,000 | $ | 5.83 | 0.2 years | $ | 40 | ||||||||||
Granted | — | — | — | — | ||||||||||||
Lapsed | (8,000 | ) | 5.83 | — | 52 | |||||||||||
Forfeited | — | — | — | — | ||||||||||||
Unvested outstanding at June 30, 2016 | — | $ | — | — | $ | — |
The aggregate intrinsic value represents the difference between the company’s closing stock price on June 30, 2016 of $7.22 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during the six months ended June 30, 2015 and 2016 was $1.3 million and $1.1 million, respectively.
As of June 30, 2016, there was $0.7 million of total unrecognized compensation cost related to non-vested stock option awards. This cost is expected to be recognized over a weighted-average period of 2.07 years.
NOTE 11. EQUITY TRANSACTIONS
We account for stock-based compensation expense in accordance with FASB ASC Topic 718, “Compensation-Stock Compensation.” As a result, $0.1 million and $0.3 million of non-cash stock-based compensation expense has been recorded to additional paid-in capital for the three and six months ended June 30, 2016, respectively, in comparison to $0.2 million and $0.5 million for the three and six months ended June 30, 2015.
While we intend to pay regular quarterly distributions, the actual declaration of such future distributions and the establishment of the per share amount, record dates, and payment dates are subject to final determination by our Board of Directors and dependent upon future earnings, cash flows, financial requirements, and other factors. The current policy of the Board of Directors is to review each of these factors on a quarterly basis to determine the appropriate amount, if any, to allocate toward a cash distribution with the general principle of using approximately 20% of free cash flow. Free cash flow is a non-GAAP measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations included with this quarterly report.
The following table shows distributions that have been declared and paid since January 1, 2015:
Announcement Date | Payment Date | Amount Per Share | Cash Distributed (in thousands) | |||||||
June 2, 2016 | June 30, 2016 | $ | 0.0650 | $ | 1,664 | |||||
March 10, 2016 | April 5, 2016 | $ | 0.0650 | $ | 1,657 | |||||
December 1, 2015 | December 29, 2015 | $ | 0.0650 | $ | 1,656 | |||||
September 1, 2015 | September 30, 2015 | $ | 0.0650 | $ | 1,655 | |||||
June 2, 2015 | June 30, 2015 | $ | 0.0650 | $ | 1,654 | |||||
March 5, 2015 | March 31, 2015 | $ | 0.0650 | $ | 1,647 |
Based on the number of shares of Class A and Class B currently outstanding, and the currently approved distribution amount, we expect to declare and pay total annual distributions of approximately $6.7 million during the year ending December 31, 2016.
NOTE 12. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share has been computed using the weighted average number of Class A and Class B shares of common stock outstanding during the period. Diluted net earnings per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding during the period plus the dilutive effects of stock options.
Options to purchase 1,634,034 and 1,942,803 shares of Class A common stock were outstanding at June 30, 2015 and 2016, respectively. Diluted weighted average shares outstanding exclude outstanding stock options whose exercise price is in excess of the average price of the company’s stock price. These options are excluded from the respective computations of diluted net income or loss per share because their effect would be anti-dilutive. As of June 30, 2015 and 2016 there were 400,366 and 501,204 dilutive shares, respectively.
NOTE 13. DERIVATIVE INSTRUMENTS
We are exposed to fluctuations in interest rates. We actively monitor these fluctuations and use derivative instruments from time to time to manage the related risk. In accordance with our risk management strategy, we may use derivative instruments only for the purpose of managing risk associated with an asset, liability, committed transaction, or probable forecasted transaction that is identified by management. Our use of derivative instruments may result in short-term gains or losses that may increase the volatility of our earnings.
21 |
Under FASB ASC Topic 815, “Derivatives and Hedging,” the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument shall be reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, shall be recognized currently in earnings.
On March 27, 2013, we entered into an interest rate swap agreement with Wells Fargo that began on March 28, 2014 with a notional principal amount of $150.0 million. The agreement was entered to offset risks associated with the variable interest rate on our Term Loan B. Payments on the swap are due on a quarterly basis with a LIBOR floor of 0.625%. The swap expires on March 28, 2019 at a fixed rate of 1.645%. The interest rate swap agreement was not designated as a cash flow hedge, and as a result, all changes in the fair value are recognized in the current period statement of operations rather than through other comprehensive income. We recorded a long-term liability of $3.0 million as of June 30, 2016, representing the fair value of the interest rate swap agreement. The swap was valued based on observable inputs for similar assets and liabilities and other observable inputs for interest rates and yield curves, which are classified within Level 2 inputs in the fair value hierarchy described below and in Note 14.
December 31, 2015 | June 30, 2016 | |||||||
(Dollars in thousands) | ||||||||
Fair value of interest rate swap liability | $ | 798 | $ | 2,979 |
NOTE 14. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820 “Fair Value Measurements and Disclosures,” established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defines three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the FASB ASC Topic 820 hierarchy are as follows:
• | Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; |
• | Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and |
• | Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data). |
As of June 30, 2016, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accrued interest approximates fair value due to the short-term nature of such instruments. The carrying value of long-term liabilities and long-term debt and capital lease obligations approximates the fair value as the related interest rates approximate rates currently available to the company. The following table summarizes the fair value of our financial assets that are measured at fair value:
June 30, 2016 | ||||||||||||||||
Total Fair Value and Carrying Value on | Fair Value Measurement Category | |||||||||||||||
Balance Sheet | Level 1 | Level 2 | Level 3 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 44 | $ | 44 | $ | — | $ | — | ||||||||
Trade accounts receivable, net | 33,091 | 33,091 | — | — | ||||||||||||
Liabilities: | ||||||||||||||||
Accounts payable | 3,612 | 3,612 | — | — | ||||||||||||
Accrued expenses including estimated fair value of contingent earn-out consideration | 10,687 | 10,246 | — | 441 | ||||||||||||
Accrued interest | 47 | 47 | — | — | ||||||||||||
Long term liabilities | 35 | 35 | — | — | ||||||||||||
Long-term debt and capital lease obligations less unamortized discount and debt issuance costs | 270,817 | — | 270,817 | — | ||||||||||||
Fair value of interest rate swap | 2,979 | — | 2,979 | — |
NOTE 15. INCOME TAXES
We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.” We did not record adjustments to the balance of our unrecognized tax benefits as of June 30, 2016 and 2015. At December 31, 2015, we had $0.1 million in liabilities for unrecognized tax benefits. Included in this liability amount is approximately $20,000 of accrued interest, net of federal income tax benefits, and $6,000 for the related penalties recorded in income tax expense on our Condensed Consolidated Statements of Operations. We expect to reduce the reserve balance to zero over the next twelve months due to statute expirations.
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Valuation Allowance (Deferred Taxes)
For financial reporting purposes, we recorded a valuation allowance of $2.8 million as of June 30, 2016 and December 31, 2015 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. We regularly review our financial forecasts in an effort to determine our ability to utilize the net operating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on our estimate of the benefit the company will receive from such carryforwards.
NOTE 16. COMMITMENTS AND CONTINGENCIES
The company enters into various agreements in the normal course of business that contain minimum guarantees. These minimum guarantees are often tied to future events, such as future revenue earned in excess of the contractual level. Accordingly, the fair value of these arrangements is zero.
The company also records contingent earn-out consideration representing the estimated fair value of future liabilities associated with acquisitions that may have additional payments due upon the achievement of certain performance targets. The fair value of the contingent earn-out consideration is estimated as of the acquisition date as the present value of the expected contingent payments as determined using weighted probabilities of the expected payment amounts. We review the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.
The company and its subsidiaries, incident to its business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. We evaluate claims based on what we believe to be both probable and reasonably estimable. With the exception of the matter described below, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. The company maintains insurance that may provide coverage for such matters.
In April 2016, pursuant to a counterclaim to a collection suit initiated by Salem, an award was issued against Salem for breach of contract and attorney fees. While we have filed an appeal against the award as well as a malpractice lawsuit against the lawyer that represented Salem in the suit, we recorded a legal reserve of $0.5 million as of March 31, 2016.
The company believes, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the company’s condensed consolidated financial position, results of operations or cash flows.
NOTE 17. SEGMENT DATA
FASB ASC Topic 280, “Segment Reporting,” requires companies to provide certain information about their operating segments. We have three operating segments: (1) Broadcast, (2) Digital Media and (3) Publishing.
Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assesses the performance of each operating segment and determines the appropriate allocations of resources to each segment. Our operating segments now meet the quantitative thresholds to qualify as reportable segments. We continually review our operating segment classifications to align with operational changes in our business and may make future changes as necessary.
We measure and evaluate our operating segments based on operating income and operating expenses that do not include allocations of costs related to corporate functions, such as accounting and finance, human resources, legal, tax and treasury; nor do they include costs such as amortization, depreciation, taxes or interest expense. Segment performance, as defined by Salem, is not necessarily comparable to other similarly titled captions of other companies.
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The table below presents financial information for each operating segment as of June 30, 2016 and 2015 based on the composition of our operating segments:
Broadcast | Digital Media | Publishing | Unallocated Corporate | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Three Months Ended June 30, 2016 | ||||||||||||||||||||
Net revenue | $ | 49,707 | $ | 11,311 | $ | 6,761 | $ | — | $ | 67,779 | ||||||||||
Operating expenses | 35,709 | 8,781 | 6,983 | 3,568 | 55,041 | |||||||||||||||
Operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration, impairment of long-lived assets and (gain) loss on the sale or disposal of assets | $ | 13,998 | $ | 2,530 | $ | (222 | ) | $ | (3,568 | ) | $ | 12,738 | ||||||||
Depreciation | 1,802 | 798 | 165 | 217 | 2,982 | |||||||||||||||
Amortization | 23 | 1,093 | 72 | 1 | 1,189 | |||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | — | (36 | ) | (98 | ) | — | (134 | ) | ||||||||||||
Impairment of long-lived assets | 700 | — | — | — | 700 | |||||||||||||||
(Gain) loss on the sale or disposal of assets | (1,721 | ) | 20 | (3 | ) | 3 | (1,701 | ) | ||||||||||||
Operating income (loss) | $ | 13,194 | $ | 655 | $ | (358 | ) | $ | (3,789 | ) | $ | 9,702 | ||||||||
Three Months Ended June 30, 2015 | ||||||||||||||||||||
Net revenue | $ | 49,060 | $ | 11,499 | $ | 6,734 | $ | — | $ | 67,293 | ||||||||||
Operating expenses | 35,187 | 8,767 | 6,469 | 3,518 | 53,941 | |||||||||||||||
Operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and loss on disposal of assets | $ | 13,873 | $ | 2,732 | $ | 265 | $ | (3,518 | ) | $ | 13,352 | |||||||||
Depreciation | 1,889 | 782 | 167 | 222 | 3,060 | |||||||||||||||
Amortization | 23 | 1,156 | 135 | 1 | 1,315 | |||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | — | (244 | ) | (63 | ) | — | (307 | ) | ||||||||||||
Loss on disposal of assets | 30 | — | — | — | 30 | |||||||||||||||
Operating income (loss) | $ | 11,931 | $ | 1,038 | $ | 26 | $ | (3,741 | ) | $ | 9,254 | |||||||||
Six Months Ended June 30, 2016 | ||||||||||||||||||||
Net revenue | $ | 98,178 | $ | 22,595 | $ | 11,581 | $ | — | $ | 132,354 | ||||||||||
Operating expenses | 71,697 | 17,967 | 11,931 | 7,781 | 109,376 | |||||||||||||||
Operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration, impairment of long-lived assets and (gain) loss on the sale or disposal of assets | $ | 26,481 | $ | 4,628 | $ | (350 | ) | $ | (7,781 | ) | $ | 22,978 | ||||||||
Depreciation | 3,650 | 1,580 | 315 | 429 | 5,974 | |||||||||||||||
Amortization | 45 | 2,142 | 144 | 1 | 2,332 | |||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | — | (106 | ) | (156 | ) | — | (262 | ) | ||||||||||||
Impairment of long-lived assets | 700 | — | — | — | 700 | |||||||||||||||
(Gain) loss on the sale or disposal of assets | (1,542 | ) | 6 | (21 | ) | 6 | (1,551 | ) | ||||||||||||
Operating income (loss) | $ | 23,628 | $ | 1,006 | $ | (632 | ) | $ | (8,217 | ) | $ | 15,785 | ||||||||
Six Months Ended June 30, 2015 | ||||||||||||||||||||
Net revenue | $ | 95,599 | $ | 22,290 | $ | 11,260 | $ | — | $ | 129,149 | ||||||||||
Operating expenses | 69,104 | 17,767 | 10,966 | 7,509 | 105,346 | |||||||||||||||
Operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and (gain) loss on the sale or disposal of assets | $ | 26,495 | $ | 4,523 | $ | 294 | $ | (7,509 | ) | $ | 23,803 | |||||||||
Depreciation | 3,840 | 1,558 | 335 | 499 | 6,232 | |||||||||||||||
Amortization | 46 | 2,326 | 271 | 1 | 2,644 | |||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | — | (211 | ) | 22 | — | (189 | ) | |||||||||||||
(Gain) loss on the sale or disposal of assets | 159 | — | (1 | ) | 1 | 159 | ||||||||||||||
Operating income (loss) | $ | 22,450 | $ | 850 | $ | (333 | ) | $ | (8,010 | ) | $ | 14,957 |
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Broadcast | Digital Media | Publishing | Unallocated Corporate | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
As of June 30, 2016 | ||||||||||||||||||||
Inventories, net | $ | — | $ | 388 | $ | 515 | $ | — | $ | 903 | ||||||||||
Property and equipment, net | 88,155 | 7,131 | 1,625 | 7,648 | 104,559 | |||||||||||||||
Broadcast licenses | 393,566 | — | — | — | 393,566 | |||||||||||||||
Goodwill | 3,581 | 20,160 | 1,044 | 8 | 24,793 | |||||||||||||||
Other indefinite-lived intangible assets | — | — | 833 | — | 833 | |||||||||||||||
Amortizable intangible assets, net | 447 | 11,522 | 1,244 | 7 | 13,220 | |||||||||||||||
As of December 31, 2015 | ||||||||||||||||||||
Inventories, net | $ | — | $ | 505 | $ | 388 | $ | — | $ | 893 | ||||||||||
Property and equipment, net | 88,788 | 7,033 | 1,742 | 7,920 | 105,483 | |||||||||||||||
Broadcast licenses | 393,031 | — | — | — | 393,031 | |||||||||||||||
Goodwill | 3,581 | 19,930 | 1,044 | 8 | 24,563 | |||||||||||||||
Other indefinite-lived intangible assets | — | — | 833 | — | 833 | |||||||||||||||
Amortizable intangible assets, net | 492 | 9,599 | 1,385 | 5 | 11,481 |
NOTE 18. SUBSEQUENT EVENTS
On August 1, 2016, we acquired the assets of Hillcrest Media Group, Inc., a provider of self-publishing services for general market authors, for $3.5 million in cash.
On July 21, 2016, we entered into an APA to acquire KXFN-AM in St. Louis, Missouri for $0.2 million. We expect the transaction to close in the latter half of 2016.
We have continued to acquire FM Translators or FM Translator Construction permits during the first FCC AMR window, which expired July 28, 2016. These transactions include the following:
Date APA Entered | Permit or ID | Authorized Site - Current | Purchase Price | Escrow Deposits | Market | |||||||||
(Dollars in thousands) | ||||||||||||||
7/25/2016 | K296AL | Crested Butte, Colorado | $ | 39 | $ | 8 | Colorado Springs, Colorado | |||||||
7/25/2016 | K283CA | Festus, Missouri * | 40 | 8 | St. Louis, Missouri | |||||||||
7/26/2016 | W263BS | Rhinelander, Wisconsin | 50 | 25 | Minneapolis, Minnesota | |||||||||
7/26/2016 | K294CP | Roseburg, Oregon * | 45 | 9 | Portland, Oregon | |||||||||
7/26/2016 | W279BK | Carbondale, Pennsylvania | 75 | 15 | Pittsburgh, Pennsylvania | |||||||||
7/26/2016 | W283BR | Dansville, New York | 75 | 15 | New York, New York | |||||||||
7/26/2016 | K228FC | Kingsville, Texas * | 50 | 10 | Houston, Texas | |||||||||
7/26/2016 | K245AR | Little Fish Lake Valley, California | 44 | 20 | Sacramento, California | |||||||||
7/26/2016 | K276FZ | Eaglemount, Washington * | 40 | 8 | Portland, Oregon | |||||||||
7/27/2016 | W256CO | Angola, Indiana * | 50 | 15 | Cleveland, Ohio | |||||||||
7/27/2016 | W249CQ | Cofax, Indiana * | 45 | 14 | St. Louis, Missouri | |||||||||
7/27/2016 | W263CS | Battle Creek, Michigan * | 50 | 15 | Cleveland, Ohio | |||||||||
7/27/2016 | W227BT | Port St Lucie, Florida | 100 | 10 | Tampa, Florida | |||||||||
W298AM | Aurora, Florida | TBD | ||||||||||||
7/28/2016 | K239CD | Lahaina, Hawaii * | 110 | 11 | Honolulu, Hawaii | |||||||||
K241BZ | Kihei, Hawaii | Honolulu, Hawaii |
* Indicates that the purchase is for a FM Translator Construction Permit.
Subsequent events reflect all applicable transactions through the date of the filing.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report. Our Condensed Consolidated Financial Statements are not directly comparable from period to period due to acquisitions and dispositions of selected assets of radio stations and acquisitions of various Internet and publishing businesses. See Note 4 of our Condensed Consolidated Financial Statements for additional information.
Salem Media Group, Inc. (“Salem”) is a domestic multi-media company with integrated operations including radio broadcasting, digital media, and publishing. Effective as of February 19, 2015, we changed our name from Salem Communications Corporation to Salem Media Group, Inc. to more accurately reflect our multi-media business. Salem was formed in 1986 as a California corporation and was reincorporated in Delaware in 1999. Our content is intended for audiences interested in Christian and family-themed programming and conservative news talk. We maintain a website at www.salemmedia.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Any information found on our website is not a part of or incorporated by reference into, this or any other report of the company filed with, or furnished to, the SEC.
OVERVIEW
We have three operating segments, (1) Broadcast, (2) Digital Media, and (3) Publishing, which reflect how our chief operating decision makers, which we define as a collective group of senior executives, assesses the performance of each operating segment and determines the appropriate allocations of resources to each segment. Our operating segments now meet the quantitative thresholds to qualify as reportable segments. We continually review our operating segment classifications to align with operational changes in our business and may make changes in the future as necessary.
We measure and evaluate our operating segments based on operating income and operating expenses that exclude costs related to corporate functions, such as accounting and finance, human resources, legal, tax and treasury. We also exclude costs such as amortization, depreciation, taxes and interest expense when evaluating the performance of our operating segments.
Our principal sources of broadcast revenues include:
· | the sale of block program time to national and local program producers; |
· | the sale of advertising time on our radio stations to national and local advertisers; |
· | the sale of advertising time on our national network; |
· | the syndication of programming on our national network; |
· | product sales and royalties for on-air host materials; |
· | the sale of banner advertisements on our station websites; |
· | the sale of digital streaming on our station websites; |
· | revenue derived from station events, including ticket sales and sponsorships; and |
· | listener purchase programs, often called non-traditional revenue, where revenue is generated from special discounts and incentives offered to our listeners from advertisers. |
The rates we are able to charge for broadcast time and advertising time are dependent upon several factors, including:
· | audience share; |
· | how well our stations perform for our clients; |
· | the size of the market; |
· | the number of impressions delivered; |
· | the number of page views achieved; |
· | the number of events held, the number of sponsorships sold, and the attendance for each event; |
· | the general economic conditions in each market; and |
· | supply and demand on both a local and national level. |
Our principal sources of digital media revenue include:
· | the sale of web-based or digital banner advertising; |
· | the sale of digital streaming advertising; |
· | the support and promotion to stream third-party content on our websites; |
· | the demand for digital delivery of our newsletters and host materials; |
· | the number of video and graphic downloads; and |
· | the demand for our wellness products. |
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Our principal sources of publishing revenue include:
· | the sale of books and e-books; |
· | subscription fees for our magazines; |
· | the sale of print magazine advertising; and |
· | publishing fees from authors. |
Broadcasting
Our foundational business is the ownership and operation of radio stations in large metropolitan markets. We own and/or operate a national portfolio of 118 radio stations in 40 markets, consisting of 34 FM stations and 84 AM Stations. We also own and operate Salem Radio Network® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Today’s Christian Music (“TCM”), Singing News Network (formerly Solid Gospel Network), and Salem Media RepresentativesTM (“SMR”). SRN, SNN, SMN and Singing News Network are networks that develop, produce and syndicate a broad range of programming specifically targeted to Christian and family-themed talk stations, music stations and general News Talk stations throughout the United States, including Salem-owned and operated stations. SMR, a national advertising sales firm with offices in ten U.S. cities, specializes in placing national advertising on religious and other commercial radio stations.
Station Formats:
Christian Teaching and Talk. We currently program 42 of our radio stations in our foundational format, Christian Teaching and Talk, which is talk programming emphasizing Christian and family themes. Through this format, a listener can hear Bible teachings and sermons, as well as gain insight to questions related to daily life, such as raising children or religious legal rights in education and in the workplace. This format uses block programming time to offer a learning resource and a source of personal support for listeners. Listeners often contact our programmers to ask questions, obtain materials on a subject matter or receive study guides based on what they have learned on the radio.
Block Programming. We sell blocks of airtime on our Christian Teaching and Talk format stations to a variety of national and local religious and charitable organizations that we believe create compelling radio programs. Historically, more than 95% of these religious and charitable organizations renew their annual programming relationships with us. Based on our historical renewal rates, we believe that block programming provides a steady and consistent source of revenue and cash flows. Our top ten programmers have remained relatively constant and average nearly 25 years on-air. Over the last five years, block-programming revenue has comprised from 40% to 41% of our total net broadcast revenue.
Satellite Radio. We program SiriusXM Channel 131, the exclusive Christian Teaching and Talk channel on SiriusXM, reaching the entire nation 24 hours a day, seven days a week.
News Talk. We currently program 33 of our radio stations in a News Talk format. Our research shows that our News Talk format is highly complementary to our core Christian Teaching and Talk format. As programmed by Salem, both of these formats express conservative views and family values. Our News Talk format also provides for the opportunity to leverage syndicated talk programming produced by our network SRN.
Contemporary Christian Music. We currently program 13 radio stations in a Contemporary Christian Music (“CCM”) format, branded The FISH® in most markets. Through the CCM format, we are able to bring listeners the words of inspirational recording artists, set to upbeat contemporary music. Our music format, branded “Safe for the Whole Family®”, features sounds that listeners of all ages can enjoy and lyrics that can be appreciated. The CCM genre continues to be popular. We believe that this listener base is underserved in terms of radio coverage, particularly in larger markets, and that our stations fill an otherwise void area in listener choices.
Spanish Language Christian Teaching and Talk. We currently program eight of our radio stations in a Spanish Language Christian Teaching and Talk format. This format is similar to our core Christian Teaching and Talk format in that it broadcasts biblical and family-themed programming, but the programming is specifically tailored for Spanish-speaking audiences. Additionally, block programming on our Spanish Language Christian Teaching and Talk stations is primarily local rather than national.
Business. We currently program 14 of our radio stations in a business format. Our business format features financial commentators, business talk, and nationally recognized Bloomberg programming. The business format operates similar to our Christian Teaching and Talk format in that it features long-form block programming.
Each of our radio stations has a website specifically designed for that station. The station websites have digital banner advertisements, streaming, links to purchase goods featured by on-air advertisers, and links to our other digital media sites.
Revenues generated from our radio stations are reported as broadcast revenue in our condensed consolidated financial statements included in Part 1 of this quarterly report on Form 10-Q. Broadcast revenues are impacted by the rates radio stations can charge for programming and advertising time, the level of airtime sold to programmers and advertisers, the number of impressions delivered or downloads made, and the number of events held, including the size of the event and the number of attendees. Block programming rates are based upon our stations’ ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for advertising time, which in turn is based on our stations and networks’ ability to produce results for their advertisers. We market ourselves to advertisers based on the responsiveness of our audiences. We do not subscribe to traditional audience measuring services for most of our radio stations. In select markets, we subscribe to Nielsen Audio, which develops quarterly reports measuring a radio station’s audience share in the demographic groups targeted by advertisers. Each of our radio stations and our networks has a pre-determined level of time available for block programming and/or advertising, which may vary at different times of the day.
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Nielsen uses its own technology to collect data for its ratings service. The Portable People Meter TM (“PPM”) is a small device that does not require active manipulation by the end user and is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals that are encoded for the service by the broadcaster. The PPM offers a number of advantages over the traditional diary ratings collection system including ease of use, more reliable ratings data and shorter time periods between when advertising runs and when audience listening or viewing habits can be reported. In markets where we subscribe to Nielsen under the PPM, our ratings tend to fluctuate even when there are no significant programming or competitive changes in the market. PPM data can fluctuate when changes are made to the “panel” (a group of individuals holding PPM devices). This makes all stations susceptible to inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time.
As is typical in the radio broadcasting industry, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. Additionally, we experience increased demand for advertising during election years by way of political advertisements. Quarterly revenue from the sale of block programming time does not tend to vary significantly because program rates are generally set annually and are recognized on a per program basis.
Our cash flows from broadcasting are affected by transitional periods experienced by radio stations when, based on the nature of the radio station, our plans for the market and other circumstances, we find it beneficial to change the station format. During this transitional period, when we develop a radio station’s listener and customer base, the station may generate negative or insignificant cash flow.
Trade or barter agreements are common in the broadcast industry. Our radio stations utilize barter agreements to exchange airtime for goods or services in lieu of cash. We enter barter agreements if the goods or services to be received can be used in our business or can be sold to our audience through Listener Purchase Programs. We limit the use of barter agreements with our general policy being not to preempt airtime sold for cash for airtime sold under a barter agreement. In each of the six months ending June 30, 2015 and 2016, we sold 97% and 98%, respectively, of our broadcast revenue for cash.
Broadcast operating expenses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses, (iv) production and programming expenses, and (v) music license fees. In addition to these expenses, our broadcast networks incur programming costs and lease expenses for satellite communication facilities.
Digital Media
Web-based and digital content has been a growth area for Salem and continues to be a focus of future development. Salem Web Network™ (“SWN”) and our other web-based businesses provide Christian and conservative-themed content, audio and video streaming, and other resources digitally through the web. SWN’s web portals include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, Jesus.org and BibleStudyTools.com. Our conservative opinion websites, collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com, HumanEvents.com and RedState.com. We also issue digital newsletters, including Eagle Financial Publications, that provide market analysis and investment strategies for individual subscribers from financial commentators. Church product websites including WorshipHouseMedia.com, SermonSpice.com, and ChurchStaffing.com offer downloads and service platforms to pastors and other educators. Our web content is accessible through all of our radio station websites that feature content of interest to local listeners throughout the United States.
E-commerce includes Eagle Wellness and Gene Smart, which are online e-commerce sites offering complimentary health advice and sales of nutritional products.
The revenues generated from this segment are reported as digital media revenue in our condensed consolidated statements of operations included in Part 1 of this quarterly report on Form 10-Q. Digital media revenues are impacted by the rates our sites can charge for advertising time, the level of advertisements sold, the number of impressions delivered or the number of downloads made, and the number digital subscriptions sold. Like our broadcasting segment, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. We also experience fluctuations in quarter over quarter comparisons based on the date in which the Easter holiday is observed, as this holiday generates a higher volume of video downloads from our church product sites. Additionally, we experience increased demand for advertising time and placement during election years for political advertisements.
The primary operating expenses incurred in the ownership and operation of our Internet businesses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses, (iv) royalties, (v) streaming costs, and (vi) cost of goods sold associated with SCP and Wellness products.
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Publishing
Our publishing operations include book publishing through Regnery Publishing, print magazines and our self-publishing service. Regnery Publishing has published dozens of bestselling books by leading conservative authors and personalities, including Ann Coulter, Newt Gingrich, David Limbaugh, Ed Klein, Mark Steyn and Dinesh D'Souza. Books are sold in traditional printed form and as eBooks.
Salem Publishing™ produces and distributes numerous Christian and conservative opinion print magazines, including: Homecoming® The Magazine, YouthWorker Journal™, Singing News®, FaithTalk Magazine™, and Preaching Magazine™. Xulon Press™ is a print-on-demand self-publishing service for Christian authors.
Revenues generated from these entities are reported as publishing revenue in our condensed consolidated financial statements included in Part 1 of this quarterly report on Form 10-Q. Publishing revenue is impacted by the retail price of books and e-books, the number of books sold, the number and retail price of e-books sold, the number and rate of print magazine subscriptions sold, the rate and number of pages of advertisements sold in each print magazine, and the number and rate at which self-published books are made. Regnery Publishing revenue has been impacted by elections as they generate higher levels of interest and demand for publications containing conservative and political based opinions.
Operating expenses incurred by Salem Publishing™ include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses, (iv) printing and production costs, including paper costs, (v) cost of goods sold, and (vi) inventory reserves.
KNOWN TRENDS AND UNCERTAINTIES
We are particularly dependent on broadcast revenue from our Los Angeles and Dallas markets, which generated 11.9% and 11.6%, respectively, of our net broadcasting revenue for the six month period ending June 30, 2016. Revenues from print magazines, including advertising revenue and subscription revenues, are challenged both economically and by the increasing use of other mediums that deliver comparable information. Book sales are contingent upon overall economic conditions and our ability to attract and retain authors. Because digital media is a concentrated growth area for us, decreases in revenue streams from these areas could affect our operating results, financial condition and results of operations. To minimize the impact that any one of these areas could have, we continue to explore opportunities to cross-promote our brands and our content, and to strategically monitor costs.
Key Financial Performance Indicators – Same Station Definition
In the discussion of our results of operations below, we compare our broadcast operating results between periods on an as-reported basis, which includes the operating results of all radio stations and networks owned or operated at any time during either period and on a “same-station” basis. We define same station net broadcast revenue as net broadcast revenue from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. We define same station broadcast operating expenses as broadcast operating expenses from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same station operating results include those stations we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same station operating results for a full calendar year are calculated as the sum of the same station-results for each of the four quarters of that year. We use same station operating results, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluations and management of the business. We believe that same station operating results provide a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming format. Our presentation of same station operating results are not intended to be considered in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition of same station operating results is not necessarily comparable to similarly titled measures reported by other companies.
Refer to “NON-GAAP FINANCIAL MEASURES” presented after our results of operation for a reconciliation of these non-GAAP performance measures to the most comparable GAAP measure.
RESULTS OF OPERATIONS
Three months ended June 30, 2016 compared to the three months ended June 30, 2015
The following factors affected our results of operations and cash flows for the three months ended June 30, 2016 as compared to the same period of the prior year:
Financing
· | On June 30, 2016, we paid $1.2 million in principal on our term loan of $300.0 million (“Term Loan B”), of which $0.4 million was an early repayment of principal, and paid interest due as of that date. We recorded a $1,300 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $3,400 in bank loan fees associated with this principal repayment. |
Acquisitions
· | On June 20, 2016, we closed on the acquisition of an FM Translator used in our Columbus, Ohio market for $0.3 million in cash. |
· | On June 10, 2016, we closed on the acquisition of an FM Translator in Amherst, New York for $60,000 in cash. The translator is used in our Pittsburgh, Pennsylvania market. |
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· | On June 8, 2016, we closed on the acquisition of an FM Translator construction permit in Charlotte, Michigan for $50,000 in cash. The translator will be used in our Detroit, Michigan market and is reflected in projects-in-process at June 30, 2016. |
· | On June 3, 2016, we closed on the acquisition of an FM Translator construction permit in Atwood, Kentucky for $88,000 in cash. The translator will be used in our Columbus, Ohio market and is reflected in projects-in-process at June 30, 2016. |
· | On May 13, 2016, we closed on the acquisition of an FM Translator construction permit in Kerrville, Texas for $50,000 in cash. The translator will be used in our Houston, Texas market and is reflected in projects-in-process at June 30, 2016. |
· | On May 2, 2016, we closed on the acquisition of an FM Translator in Lincoln, Maine for $100,000 in cash. The translator is used in our Boston, Massachusetts market. |
· | On April 29, 2016, we closed on the acquisition of a construction permit for an FM Translator in Emporia, Kansas for $25,000 in cash. The translator will be relocated to Omaha, Nebraska, for use by our KCRO-AM radio station and is reflected in projects-in-process at June 30, 2016. |
· | On April 1, 2016, we acquired the Retirement Watch newsletter and websites for $0.1 million in cash and the assumption of $0.6 million in deferred subscription liabilities. Retirement Watch offers research and strategies associated with retirement planning. We recorded goodwill of approximately $8,600 associated with the expected synergies to be realized upon combining the operations of Retirement Watch into our digital media platform and brand loyalty from its existing subscriber base that is not a separately identifiable intangible asset. |
Divestitures
· | On June 10, 2016, we received $2.5 million in cash from the National Park Service in exchange for its claim under eminent domain for our tower site in Miami, Florida. We recognized a pre-tax gain of $1.9 million from this sale. We entered into a limited terms of use agreement with the National Park Service to broadcast from the tower site for the next twenty years for a nominal fee. |
Net Broadcast Revenue
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Broadcast Revenue | $ | 49,060 | $ | 49,707 | $ | 647 | 1.3 | % | 72.9 | % | 73.3 | % | ||||||||||||
Same Station Net Broadcast Revenue | $ | 48,920 | $ | 48,970 | $ | 50 | 0.1 | % |
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Three Months Ended June 30, | ||||||||||||||||
2015 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Block program time: | ||||||||||||||||
National | $ | 11,396 | 23.2 | % | $ | 12,374 | 24.9 | % | ||||||||
Local | 8,644 | 17.6 | % | 8,896 | 17.9 | % | ||||||||||
20,040 | 40.8 | % | 21,270 | 42.8 | % | |||||||||||
Broadcast Advertising: | ||||||||||||||||
National | 3,719 | 7.6 | % | 2,974 | 6.0 | % | ||||||||||
Local | 16,403 | 33.4 | % | 16,371 | 32.9 | % | ||||||||||
20,122 | 41.0 | % | 19,345 | 38.9 | % | |||||||||||
Station Digital | 1,382 | 2.8 | % | 1,431 | 2.9 | % | ||||||||||
Infomercials | 681 | 1.4 | % | 593 | 1.2 | % | ||||||||||
Network | 3,465 | 7.1 | % | 3,945 | 7.9 | % | ||||||||||
Other | 3,370 | 6.9 | % | 3,123 | 6.3 | % | ||||||||||
Net broadcast revenue | $ | 49,060 | 100.0 | % | $ | 49,707 | 100.0 | % |
Block programming revenue increased $1.2 million including $0.5 million generated from stations that were acquired during the year ended December 31, 2015. In existing markets, we saw increases in the number of national and local programmers featured on our stations. The increase in the number of programmers creates a higher demand for time slots, which can also result in the realization of higher rates. Revenue from National Ministry programmers increased $0.4 million while revenue from local programmers increased $0.1 million on our Christian Teaching & Talk format stations. Block programming revenue also increased $0.2 million on our News Talk stations.
Advertising revenue, net of agency commissions, decreased by $0.8 million. Excluding political revenue, which increased $0.3 million, advertising revenue declined by $1.1 million. The decline includes a $1.4 million reduction in national advertising sales on our CCM format stations due to higher competition for advertising sales from agencies that was offset by a $0.3 million increase in local advertising sales on our News Talk format stations. Local advertising sales reflect a higher demand for air-time, particularly on our News Talk format stations that benefit from political advertising and news content from presidential debates. The higher demand for air time results in higher spot rates for premium air time.
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Digital revenues from our radio station websites were consistent in both the number of advertisers and the rates charged as compared to the same period of the prior year.
Declines in infomercial revenues of $0.1 million reflect our efforts to feature programming that is tailored to our listeners and consistent with our company values. We continue to seek alternatives to infomercial programs that we believe are not of interest to our listeners.
The growth in network revenues of $0.5 million includes an increase of $0.6 million in network affiliation fees from a higher level of stations syndicating our programs offset by a $0.1 million decline in political advertisements.
Other revenues declined by $0.2 million due to a lower demand from listeners to participate in sales incentives and discounts offered under listener purchase programs. This lower demand resulted in a $0.2 million decline in listener purchase program revenue and a $0.1 million decrease in event revenues that were partially offset by a $33,000 increase real estate and tower rents.
On a same station basis, net broadcast revenue increased $0.1 million, which reflects these items net of the impact of revenue generated from newly-acquired stations.
Net Digital Media Revenue
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Digital Media Revenue | $ | 11,499 | $ | 11,311 | $ | (188 | ) | (1.6 | )% | 17.1 | % | 16.7 | % |
Three Months Ended June 30, | ||||||||||||||||
2015 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Digital Advertising, Net | $ | 5,999 | 52.2 | % | $ | 6,106 | 54.0 | % | ||||||||
Digital Streaming | 1,100 | 9.5 | 1,137 | 10.0 | ||||||||||||
Digital Subscriptions | 1,331 | 11.6 | 1,293 | 11.4 | ||||||||||||
Digital Downloads | 2,134 | 18.5 | 1,910 | 16.9 | ||||||||||||
e-commerce | 869 | 7.6 | 811 | 7.2 | ||||||||||||
Other | 66 | 0.6 | 54 | 0.5 | ||||||||||||
Net Digital Media Revenue | $ | 11,499 | 100.0 | % | $ | 11,311 | 100.0 | % |
On a consolidated basis, digital advertising revenue, net of agency commissions, increased by $0.1 million. Salem Web Network digital advertising revenue increased $0.2 million due to growth in the number of page views generated from the use of mobile applications which was offset by declines in digital revenue generated from Red State, a conservative news blog site. While changes in the Facebook newsfeed algorithm have negatively impacted our page views, we are beginning to see an increase in the monetization of page views from mobile applications. The number of page views generated directly impacts the amount of digital advertising revenue generated for each site. Mobile page views typically carry lower advertising inventory and lower rates as compared to desktop page views.
Digital streaming revenues of content available on our Christian websites were consistent with that of the same period of the prior year both in sales volume and in rates charged.
The decline in digital subscription revenue reflects lower distribution levels of Eagle Financial Publications. The stock market performance during the six month period ending June 30, 2016, specifically the drop in the market during January 2016, negatively impacted the demand for these products. There were no changes in subscriber fee rates during this period.
The $0.2 million decrease in digital download revenue reflects a lower volume of downloads during the three month period ending June 30, 2016 as compared to the same period of the prior year. Of this decrease, $0.2 million was generated from WorshipHouseMedia.com and $0.1 million from SermonSpice.com, which benefited from the Easter holiday falling in the first quarter of 2016 as compared to the second quarter of 2015. The decrease was offset by a $0.1million increase generated from job posting fees for ChristianStaffing.com. There were no changes in fee rates charged to our customers for digital downloads.
E-commerce revenue includes sales of wellness products from Eagle Wellness and Gene Smart, which was acquired on June 4, 2015. Sales of Eagle Wellness products declined by $68,000 and were partially offset with products sold under Gene Smart of $28,000. The net decline reflects a 6.3% reduction in the number of products sold offset by a 1.3% increase in the average retail price.
Net Publishing Revenue
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Publishing Revenue | $ | 6,734 | $ | 6,761 | $ | 27 | 0.4 | % | 10.0 | % | 10.0 | % |
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Three Months Ended June 30, | ||||||||||||||||
2015 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Book Sales | $ | 4,511 | 67.0 | % | $ | 5,130 | 75.9 | % | ||||||||
Estimated Sales Returns & Allowances | (1,369 | ) | (20.3 | ) | (1,742 | ) | (25.8 | ) | ||||||||
e-Book Sales | 802 | 11.9 | 550 | 8.1 | ||||||||||||
Self-Publishing Fees | 1,477 | 21.9 | 1,613 | 23.9 | ||||||||||||
Print Magazine Subscriptions | 490 | 7.3 | 430 | 6.4 | ||||||||||||
Print Magazine Advertisements | 448 | 6.6 | 375 | 5.5 | ||||||||||||
Other | 375 | 5.6 | 405 | 6.0 | ||||||||||||
Net Publishing Revenue | $ | 6,734 | 100.0 | % | $ | 6,761 | 100.0 | % |
Consolidated book sales include a $0.7 million increase in print book sales from Regnery Publishing. The volume of book sales generated from Regnery is directly attributable to the composite mix of titles available in each period. Revenues from book sales increase based on the number of available titles that achieve the New York Times bestseller list as this increases awareness and demand for the publication(s). The increase in estimated sales returns and allowances for Regnery Publishing of $0.4 million includes returns processed for lower than expected book sales primarily associated with one release. Overall, the increase is consistent with the higher volume of print book sales during the three months ending June 30, 2016 as compared to the prior year. Xulon Press books sales decreased $0.1 million due to a decrease in the number of author submissions. There were no changes in rates.
E-book sales from Regnery Publishing decreased $0.3 million based on the number of units sold as compared to the prior year. The decline is attributable to the composite mix of titles available in each of the years and the number of titles that achieve the New York bestseller list.
Xulon Press self-publishing fees increased $0.1 million due to growth in the number of authors that utilized the services. There were no changes in fees as compared to the same period of the prior year. We believe that our ability to cross-promote Xulon’s self-publishing services to authors interested in Regnery Publishing provides us with ongoing growth potential.
Print magazine revenue continues to decline with a $0.1 million reduction in subscription revenue based on the number of subscribers and a corresponding $0.1 million decline in advertising revenues based on reduced demand and reduced rates due to lower distribution levels. We continue to explore cost reductions in this segment to offset the eroding revenue base.
Broadcast Operating Expenses
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Broadcast Operating Expenses | $ | 35,187 | $ | 35,709 | $ | 522 | 1.5 | % | 52.3 | % | 52.7 | % | ||||||||||||
Same Station Broadcast Operating Expenses | $ | 35,039 | $ | 34,958 | $ | (81 | ) | (0.2 | )% |
Increases in broadcast operating expenses include $0.7 million in expenses associated with stations that were acquired during 2015 that are included in all 2016 reporting periods. These stations, as well as our existing markets, show a $0.6 million increase in personnel-related costs due to an increase in staffing associated with acquisitions. These increases were offset by a $0.3 million decline in bad debt expense due to successful collection efforts. On a same station basis, broadcast operating expenses decreased by $0.1 million, which reflects these items net of the impact of costs generated from newly-acquired stations.
Digital Media Operating Expenses
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Digital Media Operating Expenses | $ | 8,767 | $ | 8,781 | $ | 14 | 0.2 | % | 13.0 | % | 13.0 | % |
Operating expenses for Salem Web Network and Townhall decreased by $0.1 million including a $0.1 million decline in royalties and $0.1 million decrease in facility-related expenses offset by an increase in hosting and streaming expenses of $0.1 million.
Operating expenses associated with Eagle Financial Publications increased by $0.1 million, including a $0.1 million increase in advertising and promotions and an increase of $27,000 in personnel-related expenses that were offset by a $30,000 decline in royalties’ expenses.
There were no changes in operating costs associated with our E-commerce businesses. All changes noted in royalty expenses were consistent with changes in digital media revenues.
Publishing Operating Expenses
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Publishing Operating Expenses | $ | 6,469 | $ | 6,983 | $ | 514 | 7.9 | % | 9.6 | % | 10.3 | % |
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Publishing operating expenses include cost of goods sold associated with book sales on Regnery Publishing of $0.6 million for the three months ended June 30, 2016 compared to $0.5 million for the same period of the prior year. There were no significant changes in the operating margins for Regnery Publishing. Higher variable costs include a $0.5 million increase in royalties and a $0.1 million increase in personnel-related expenses that were offset by a $0.2 million decline in advertising and promotion expenses.
Operating expenses associated with our print magazines declined $77,000 consistent with lower print magazine subscription and advertising revenue. This was partially offset by a $34,000 increase in variable costs including bad debt expense and computer supplies.
Operating expenses associated with Xulon Press book sales decreased $6,000 consistent with the lower level of book sales. We incurred higher variable costs of $15,000 including $35,000 in advertising expenses and $28,000 in professional services that were offset by a decrease of $40,000 in bad debt expense.
Unallocated Corporate Expenses
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Unallocated Corporate Expenses | $ | 3,518 | $ | 3,568 | $ | 50 | 1.4 | % | 5.2 | % | 5.3 | % |
Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury that are not directly attributable to any one of our operating segments. Increases in these costs over the prior year primarily relate to personnel-related expenses.
Depreciation Expense
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Depreciation Expense | $ | 3,060 | $ | 2,982 | $ | (78 | ) | (2.5 | )% | 4.5 | % | 4.4 | % |
There were no changes in our depreciation methods or in the estimated useful lives of our asset groups. The decline in depreciation of $0.1 million reflects the impact of computer software capitalized with acquisitions during 2012 that were fully depreciated as of the three month period ending June 30, 2016, compared to depreciation expense of $0.1 million for the same period of the prior year as well as the composite mix of other capital expenditures that were also fully depreciated. Capital expenditures and acquisitions from the second, third and fourth quarter of 2015 are expected to increase depreciation expense over the remainder of 2016.
Amortization Expense
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Amortization Expense | $ | 1,315 | $ | 1,189 | $ | (126 | ) | (9.6 | )% | 2.0 | % | 1.8 | % |
There were no changes in our amortization methods or in the estimated useful lives of our intangible asset groups. The decline in amortization expense of $0.1 million reflects the impact of customer lists and contracts acquired with Eagle Publishing that were fully amortized as of the three month period ending June 30, 2016, compared to amortization expense of $0.5 million during the same period of the prior year. This decline was partially offset by a $0.2 million increase in amortization of intangible assets that were acquired in the third and fourth quarters of 2015.
Change in the Estimated Fair Value of Contingent Earn-Out Consideration
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | $ | (307 | ) | $ | (134 | ) | $ | 173 | (56.4 | )% | (0.5 | )% | (0.2 | )% |
Our acquisitions may include contingent earn-out consideration as part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. We review the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable.
During the three month period ending June 30, 2016, we reduced the estimated fair value of our contingent earn-out liabilities by $36,000 compared to a net decrease of $0.3 million during the same period of the prior year. These changes are based on actual results as compared to the estimates used in our probability analysis for each contingency. Refer to Note 5 of our condensed consolidated financial statements for a detailed analysis of the changes in our assumptions and the impact for each contingency.
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Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.
Impairment of Long-Lived Assets
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Impairment of long-lived assets | $ | — | $ | 700 | $ | 700 | 100.0 | % | — | % | 1.0 | % |
Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. At that time we evaluated the land for impairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded the estimated fair value less costs to sell and recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price at that time. In December 2012, after several purchase offers for the land were terminated, we obtained a third-party valuation for the land. Based on the fair value determined by the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. While we continue to market the land for sale and have no intention to use the land in our operations, we have not received successful offers. Based on the amount of time that the land has been held for sale, we obtained a third-party valuation for the land as of June 2016. Based on this fair value appraisal, we recorded an additional $0.7 million impairment charge associated with the land during the three months ended June 30, 2016.
(Gain) Loss on the Sale or Disposal of Assets
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
(Gain) loss on the sale or disposal of assets | $ | 30 | $ | (1,701 | ) | $ | (1,731 | ) | (5,770.0 | )% | — | % | (2.5 | )% |
The net gain on the sale or disposal of assets of $1.6 million for the three month period ending June 30, 2016 includes a $1.9 million gain on the sale of our Miami tower site offset by a $0.2 million charge for leasehold improvements written off upon the relocation of our offices in Washington D.C. market in addition to various insignificant fixed asset disposals.
Other Income (Expense)
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Interest income | $ | 2 | $ | 2 | $ | — | — | % | — | % | — | % | ||||||||||||
Interest expense | (3,874 | ) | (3,730 | ) | 144 | (3.7 | )% | (5.8 | )% | (5.6 | )% | |||||||||||||
Change in the fair value of interest rate swap | 444 | (423 | ) | (867 | ) | (195.3 | )% | 0.7 | % | (0.6 | )% | |||||||||||||
Loss on early retirement of long-term debt | — | (5 | ) | (5 | ) | — | % | — | % | — | % |
Interest income represents earnings on excess cash and interest due under promissory notes.
Interest expense includes interest due on outstanding debt balances, interest due on our swap agreement and non-cash interest accretion related to deferred payments related to our acquisition activity and from our contingent earn-out consideration.
The change in the fair value of interest rate swap reflects the mark-to-market fair value adjustment of the interest rate swap agreement that was entered into on March 28, 2013.
The loss on early retirement of long-term debt reflects the unamortized discount and bank loan fees associated with principal repayments on our Term Loan B.
Provision for Income Taxes
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Provision for income taxes | $ | 2,303 | $ | 2,190 | $ | (113 | ) | (4.9 | )% | 3.4 | % | 3.2 | % |
In accordance with FASB ASC Topic 740, “Income Taxes,” our tax provision for income taxes decreased $0.1 million for the three months ending June 30, 2016 to $2.2 million compared to $2.3 million for the same period of the prior year. The provision for income taxes as a percentage of income before income taxes, or the effective tax rate, was 39.5% for the three months ended June 30, 2016 and 2015. The effective tax rate for each period differs from the federal statutory income rate of 35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards.
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Net Income
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Income | $ | 3,523 | $ | 3,356 | $ | (167 | ) | (4.7 | )% | 5.2 | % | 5.0 | % |
We recognized net income of $3.4 million for the three month period ending June 30, 2016 compared to $3.5 million in the same period of the prior year. During this period, our operating income increased by $0.4 million due to a $0.5 million increase in net revenue that was offset by a $0.1 million increase in operating expenses. Included in operating expenses are a $1.9 million gain from the sale of our Miami tower site and a $0.7 million impairment charge. We also recognized a $0.8 million increase in other expenses based on the change in the fair value of our interest rate swap agreement.
Six months ended June 30, 2016 compared to the six months ended June 30, 2015
The following factors affected our results of operations and cash flows for the six months ended June 30, 2016 as compared to the same period of the prior year:
Financing
· | On June 30, 2016, we paid $1.2 million in principal on our term loan of $300.0 million (“Term Loan B”), of which $0.4 million was an early repayment of principal. We recorded a $1,300 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $3,400 in bank loan fees associated with this principal repayment. |
· | On March 17, 2016, we paid $0.8 million in principal on our Term Loan B and paid interest due as of that date. We recorded a $2,500 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $6,700 in bank loan fees associated with this principal repayment. |
Acquisitions
· | On June 20, 2016, we closed on the acquisition of an FM Translator used in our Columbus, Ohio market for $0.3 million in cash. |
· | On June 10, 2016, we closed on the acquisition of an FM Translator in Amherst, New York for $60,000 in cash. The translator is used in our Pittsburgh, Pennsylvania market. |
· | On June 8, 2016, we closed on the acquisition of an FM Translator construction permit in Charlotte, Michigan for $50,000 in cash. The translator will be used in our Detroit, Michigan market and is reflected in projects-in-process at June 30, 2016. |
· | On June 3, 2016, we closed on the acquisition of an FM Translator construction permit in Atwood, Kentucky for $88,000 in cash. The translator will be used in our Columbus, Ohio market and is reflected in projects-in-process at June 30, 2016. |
· | On May 13, 2016, we closed on the acquisition of an FM Translator in construction permit Kerrville, Texas for $50,000 in cash. The translator will be used in our Houston, Texas market and is reflected in projects-in-process at June 30, 2016. |
· | On May 2, 2016, we closed on the acquisition of an FM Translator in Lincoln, Maine for $100,000 in cash. The translator is used in our Boston, Massachusetts market. |
· | On April 29, 2016, we closed on the acquisition of a construction permit for an FM Translator in Emporia, Kansas for $25,000 in cash. The translator will be relocated to Omaha, Nebraska, for use by our KCRO-AM radio station and is reflected in projects-in-process at June 30, 2016. |
· | On April 1, 2016, we acquired the Retirement Watch newsletter and websites for $0.1 million in cash and the assumption of $0.6 million in deferred subscription liabilities. |
· | On March 8, 2016, we acquired King James Bible mobile applications for $4.0 million of which $2.7 million was paid in cash upon close and $1.3 million is due in deferred installments within one year from the closing date. |
Divestitures
· | On June 10, 2016, we received $2.5 million in cash from the National Park Service in exchange for its claim under eminent domain for our tower site in Miami, Florida. We recognized a pre-tax gain of $1.9 million from this sale. We entered a limited terms of use agreement with the National Park Service to broadcast from the tower site for the next twenty years for a nominal fee. |
Net Broadcast Revenue
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Broadcast Revenue | $ | 95,599 | $ | 98,178 | $ | 2,579 | 2.7 | % | 74.0 | % | 74.2 | % | ||||||||||||
Same Station Net Broadcast Revenue | $ | 95,459 | $ | 96,661 | $ | 1,202 | 1.3 | % |
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The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Six Months Ended June 30, | ||||||||||||||||
2015 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Block program time: | ||||||||||||||||
National | $ | 22,445 | 23.5 | % | $ | 24,456 | 24.9 | % | ||||||||
Local | 17,384 | 18.2 | % | 18,014 | 18.4 | % | ||||||||||
39,829 | 41.7 | % | 42,470 | 43.3 | % | |||||||||||
Broadcast Advertising: | ||||||||||||||||
National | 7,211 | 7.5 | % | 6,424 | 6.5 | % | ||||||||||
Local | 31,159 | 32.6 | % | 31,659 | 32.3 | % | ||||||||||
38,370 | 40.1 | % | 38,083 | 38.8 | % | |||||||||||
Station Digital | 2,706 | 2.8 | % | 2,765 | 2.8 | % | ||||||||||
Infomercials | 1,394 | 1.5 | % | 1,216 | 1.2 | % | ||||||||||
Network | 7,118 | 7.4 | % | 8,207 | 8.4 | % | ||||||||||
Other | 6,182 | 6.5 | % | 5,437 | 5.5 | % | ||||||||||
Net broadcast revenue | $ | 95,599 | 100.0 | % | $ | 98,178 | 100.0 | % |
Block programming revenue increased by $2.6 million of which $1.0 million was generated from stations that were acquired during the year ended December 31, 2015. In existing markets, we saw increases in the number of both national and local programmers featured on our stations. The increase in the number of programmers creates a higher demand for time slots, which can result in the realization of higher rates. On our Christian Teaching & Talk station, revenue from National Ministry programmers increased $0.9 million while revenue from local programmers increased $0.2 million. Revenue from our News Talk stations increased $0.4 million while revenue from our Spanish Christian Teaching and Talk stations increased $0.1 million.
Advertising revenue, net of agency commissions, decreased by $0.3 million. Excluding political revenue, which increased $0.9 million, advertising revenue declined by $1.2 million. This decline includes a $2.1 million decrease in local and national advertising sales on our CCM format stations due to higher competition for advertising sales from agencies that was partially offset by a $0.8 million increase in local advertising sales. The increase in local advertising resulted from a higher demand for air-time, particularly on our News Talk, Business Talk and Spanish Christian Teaching and Talk format stations that benefit from political advertising and news content from presidential debates.
Digital revenues generated from our radio station websites were consistent with both the number of advertisers and the rates charged as compared to the same period of the prior year.
Declines in infomercial revenues of $0.2 million reflect our efforts to feature programming that is tailored to our listeners and consistent with our company values. We continue to seek alternatives to infomercial programs which we believe are not of interest to our listeners.
The growth in network revenues of $1.1 million include political advertisements of $0.2 million and an increase of $0.8 million in network affiliation fees from increases in the number of stations syndicating our programs.
Other revenues declined by $0.7 million due to a lower demand from listeners to participate in sales incentives and discounts offered under listener purchase programs. This lower demand resulted in a $0.8 million decline in listener purchase program revenue that was partially offset by a $54,000 increase in real estate and tower rents.
On a same station basis, net broadcast revenue increased $1.2 million, which reflects these items net of the impact of start-up costs associated with format changes and station acquisitions.
Net Digital Media Revenue
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Digital Media Revenue | $ | 22,290 | $ | 22,595 | $ | 305 | 1.4 | % | 17.3 | % | 17.1 | % |
Six Months Ended June 30, | ||||||||||||||||
2015 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Digital Advertising, Net | $ | 11,599 | 52.0 | % | $ | 12,221 | 54.1 | % | ||||||||
Digital Streaming | 2,179 | 9.8 | 2,257 | 10.0 | ||||||||||||
Digital Subscriptions | 2,634 | 11.8 | 2,360 | 10.4 | ||||||||||||
Digital Downloads | 4,024 | 18.0 | 3,989 | 17.7 | ||||||||||||
e-commerce | 1,752 | 7.9 | 1,652 | 7.3 | ||||||||||||
Other | 102 | 0.5 | 116 | 0.5 | ||||||||||||
Net Digital Media Revenue | $ | 22,290 | 100.0 | % | $ | 22,595 | 100.0 | % |
36 |
On a consolidated basis, digital advertising revenue, net of agency commissions, increased by $0.6 million. Included in this amount is a $0.1 million increase in revenue generated from Townhall.com based on a higher volume of page views driven by the current year political elections. Digital advertising revenue generated from Salem Web Network increased $0.5 million due to growth in the number of page views generated from the use of mobile applications. While changes in the Facebook newsfeed algorithm have negatively impacted our page views, we are beginning to see an increase in monetization of page views from mobile applications. The number of page views generated directly impacts the amount of digital advertising revenue generated for each site. Mobile page views typically carry lower advertising inventory and lower rates as compared to desktop page views.
Digital streaming revenues of content available on our Christian websites increased $0.1 million as compared to the same period of the prior due to an increase in volume of streaming content from our Christian content websites.
The $0.3 million decline in digital subscription revenue reflects lower distribution levels of Eagle Financial Publications. The stock market performance during the six month period ending June 30, 2016, specifically the drop in the market during January 2016, negatively impacted the demand for these products. There were no changes in subscriber fee rates during this period.
The $35,000 decrease in digital download revenue reflects a lower volume of downloads from our Church Products division websites, including a $0.1 million decline of video downloads on our SermonSpice.com offset by a $0.1 million increase in fees generated from ChurchStaffing.com. There were no changes in fee rates charged to our customers for digital downloads.
E-commerce revenue includes sales of wellness products from Eagle Wellness and Gene Smart, which was acquired on June 4, 2015. Sales of Eagle Wellness products declined by $0.1 million due to a lower number of products sold. The decline was partially offset with sales of products under Gene Smart of $64,000. The net decline reflects a 6.0% reduction in the number of products sold and a discount on retail prices of less than 0.1%.
Net Publishing Revenue
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Publishing Revenue | $ | 11,260 | $ | 11,581 | $ | 321 | 2.9 | % | 8.7 | % | 8.8 | % |
Six Months Ended June 30, | ||||||||||||||||
2015 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Book Sales | $ | 6,849 | 60.8 | % | $ | 7,825 | 67.6 | % | ||||||||
Estimated Sales Returns & Allowances | (1,944 | ) | (17.2 | ) | (2,437 | ) | (21.0 | ) | ||||||||
e-Book Sales | 1,222 | 10.9 | 957 | 8.2 | ||||||||||||
Self-Publishing Fees | 2,768 | 24.6 | 3,046 | 26.3 | ||||||||||||
Print Magazine Subscriptions | 849 | 7.5 | 767 | 6.6 | ||||||||||||
Print Magazine Advertisements | 849 | 7.5 | 721 | 6.2 | ||||||||||||
Other | 667 | 5.9 | 702 | 6.1 | ||||||||||||
Net Publishing Revenue | $ | 11,260 | 100.0 | % | $ | 11,581 | 100.0 | % |
Consolidated book sale revenues include a $1.2 million increase in print book sales from Regnery Publishing. The increase is directly attributable to the composite mix of titles available in each of the periods. Revenues from book sales increase based on the number of available titles that achieve the New York Times bestseller list as this increases awareness and demand for the publication(s). The increase in estimated sales returns and allowances for Regnery Publishing of $0.5 million is consistent with the higher volume of print book sales during the three months ending June 30, 2016 as compared to the prior year. Xulon Press books sales decreased $0.2 million due to a decrease in the number of author submissions.
E-book sales from Regnery Publishing decreased $0.3 million due to the number of units sold as compared to the prior year. The decline is directly attributable to the composite mix of titles available in each of the years and the number of titles that achieve the New York Times bestsellers list.
Xulon Press self-publishing fees increased $0.3 million due to growth in the number of authors that utilize the services. There were no changes in fees as compared to the same period of the prior year. We believe that our ability to cross-promote Xulon’s self-publishing services to authors interested in Regnery Publishing provides us with ongoing growth potential.
Print magazine revenue continues to decline with a $0.1 million reduction in subscription revenue based on the number of subscribers and a corresponding $0.1 million decline in advertising revenues based on reduced demand and reduced rates due to lower distribution levels. We continue to explore cost reductions in this segment to offset the eroding revenue base.
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Broadcast Operating Expenses
Six Months Ended March 31, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Broadcast Operating Expenses | $ | 69,104 | $ | 71,697 | $ | 2,593 | 3.8 | % | 53.5 | % | 54.2 | % | ||||||||||||
Same Station Broadcast Operating Expenses | $ | 68,945 | $ | 70,098 | $ | 1,153 | 1.7 | % |
Broadcast operating expenses increased by $2.6 million including a $1.9 million in increase in personnel-related costs that include sales-based commissions consistent with the increase in revenues, a $0.9 million increase in facility-related expenses a $0.5 million charge associated with a contract litigation matter, and $0.2 million of costs associated with a corporate-sponsored conference, The conference was held in January 2016 and featured our local and national talk show hosts to focus on opportunities with the upcoming political elections. These higher costs were offset with a $0.6 million decline in bad debt expense due to successful collection efforts and a $0.3 million decline in discretionary advertising costs. The increase in broadcast operating expenses on a same station basis reflects these items net of the impact of start-up costs associated with format changes and station launches.
Digital Media Operating Expenses
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Digital Media Operating Expenses | $ | 17,767 | $ | 17,967 | $ | 200 | 1..1 | % | 13.8 | % | 13.6 | % |
Operating expenses associated with Salem Web Network and Townhall increased $28,000. The change includes a $0.3 million increase in hosting and streaming expenses that was offset by a $0.1 million decline in bad debt expenses from successful collection efforts, a $0.1 million decrease in facility-related expenses and a $49,000 decline in personnel-related expenses.
Operating expenses associated with Eagle Financial Publications increased $0.1 million, including a $0.2 million increase in advertising costs and a $35,000 increase in personnel-related costs that were offset with a decline of $45,000 in royalties based on the lower volume of digital subscriptions sold.
Variable expenses associated with Eagle Wellness increased $0.1 million, including a $45,000 increase in royalties and a $29,000 increase in professional services based on higher sales volumes.
Publishing Operating Expenses
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Publishing Operating Expenses | $ | 10,966 | $ | 11,931 | $ | 935 | 8.8 | % | 8.5 | % | 9.0 | % |
Publishing operating expenses include cost of goods sold associated with Regnery Publishing of $0.9 million for the six months ended June 30, 2016 compared to $0.8 million for the same period of the prior year. There were no significant changes in our margins. Higher variable costs include $0.9 million in royalties and $0.2 million in personnel-related expenses that were offset by a $0.1 million decrease in advertising and promotion expenses and a $0.1 million decrease in fulfillment costs.
Operating expenses associated with our print magazines declined $0.1 million consistent with reductions in the number of subscribers and lower advertising revenue.
Xulon Press operating expenses include cost of goods sold from book sales of $1.4 million, which declined slightly from the same period of the prior year based on lower sales volumes. Other operating expenses increased by $40,000 including a $60,000 increase in professional service fees that were offset by $15,000 in savings from bad debt expense.
Unallocated Corporate Expenses
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Unallocated Corporate Expenses | $ | 7,509 | $ | 7,781 | $ | 272 | 3.6 | % | 5.8 | % | 5.9 | % |
Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury that are not directly attributable to any one of our operating segments. Increases in these costs over the prior year include a $0.3 million increase in personnel-related costs and a $0.2 million increase in professional services offset by a $0.1 million decline in acquisition-related costs.
Depreciation Expense
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Depreciation Expense | $ | 6,232 | $ | 5,974 | $ | (258 | ) | (4.1 | )% | 4.8 | % | 4.5 | % |
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There were no changes in our depreciation methods or in the estimated useful lives of our asset groups. The decline in depreciation of $0.3 million reflects the impact of computer software capitalized with acquisitions during 2012 that were fully depreciated as of the six month period ending June 30, 2016, compared to depreciation expense of $0.2 million for the same period of the prior year as well as the composite mix of other capital expenditures that were also fully depreciated. Capital expenditures and acquisitions from the third and fourth quarter of 2015 are expected to increase depreciation expense over the remainder of 2016.
Amortization Expense
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Amortization Expense | $ | 2,644 | $ | 2,332 | $ | (312 | ) | (11.8 | )% | 2.0 | % | 1.8 | % |
There were no changes in our amortization methods or in the estimated useful lives of our intangible asset groups. The decline in amortization expense reflects the impact of customer lists and contracts acquired with Eagle Publishing that were fully amortized as of the six month period ending June 30, 2016, compared to amortization expense of $0.6 million during the same period of the prior year. This decline was partially offset by a $0.2 million increase in amortization of intangible assets that were acquired in the third and fourth quarters of 2015.
Change in the Estimated Fair Value of Contingent Earn-Out Consideration
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | $ | (189 | ) | $ | (262 | ) | $ | (73 | ) | 38.6 | % | (0.1 | )% | (0.2 | )% |
Our acquisitions may include contingent earn-out consideration as part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. We review the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable.
During the six month period ending June 30, 2016 and 2015, we reduced the estimated fair value of our contingent earn-out liabilities by $0.2 million. These changes are based on actual results as compared to the estimates used in our probability analysis for each contingency. Refer to Note 5 of our condensed consolidated financial statements for a detailed analysis of the changes in our assumptions and the impact for each contingency.
Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.
Impairment of Long-Lived Assets
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Impairment of long-lived assets | $ | — | $ | 700 | $ | 700 | 100.0 | % | — | % | 0.5 | % |
Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. At that time we evaluated the land for impairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded the estimated fair value less costs to sell and recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price at that time. In December 2012, after several purchase offers for the land were terminated, we obtained a third-party valuation for the land. Based on the fair value determined by the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. While we continue to market the land for sale and have no intention to use the land in our operations, we have not received successful offers. Based on the amount of time that the land has been held for sale, we obtained a third-party valuation for the land as of June 2016. Based on this fair value appraisal, we recorded an additional $0.7 million impairment charge associated with the land during the three months ended June 30, 2016.
(Gain) Loss on the Sale or Disposal of Assets
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
(Gain) loss on the sale or disposal of assets | $ | 159 | $ | (1,551 | ) | $ | (1,710 | ) | (1,075.5 | )% | 0.1 | % | (1.2 | )% |
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The net gain on the sale or disposal of assets of $1.6 million for the six month period ending June 30, 2016 includes a $1.9 million gain on the sale of our Miami tower site offset by a $0.4 million charge associated with the relocation of our offices in the Washington D.C. market and various fixed asset disposals.
The net loss on the sale or disposal of assets for the same period of the prior year includes a $0.2 million charge associated with the relocation of our office and studio in the Seattle, Washington market offset by various fixed asset disposals.
Other Income (Expense)
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Interest income | $ | 3 | $ | 3 | $ | — | — | % | — | % | — | % | ||||||||||||
Interest expense | (7,678 | ) | (7,526 | ) | 152 | (2.0 | )% | (5.9 | )% | (5.7 | )% | |||||||||||||
Change in the fair value of interest rate swap | (976 | ) | (2,181 | ) | (1,205 | ) | 123.5 | % | (0.8 | )% | (1.6 | )% | ||||||||||||
Loss on early retirement of long-term debt | (41 | ) | (14 | ) | 27 | (65.9 | )% | — | % | — | % | |||||||||||||
Net miscellaneous income and (expenses) | 7 | — | (7 | ) | (100.0 | )% | — | % | — | % |
Interest income represents earnings on excess cash and interest due under promissory notes.
Interest expense includes interest due on outstanding debt balances, interest due on our swap agreement and non-cash interest accretion related to deferred payments related to our acquisition activity and from our contingent earn-out consideration.
The change in the fair value of interest rate swap reflects the mark-to-market fair value adjustment of the interest rate swap agreement that was entered into on March 28, 2013.
The loss on early retirement of long-term debt reflects the unamortized discount and bank loan fees associated with principal redemptions of our Term Loan B.
Net miscellaneous income and expenses includes royalty income, usage fees for our real estate properties and insurance proceeds.
Provision for Income Taxes
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Provision for income taxes | $ | 2,454 | $ | 2,358 | $ | (96 | ) | (3.9 | )% | 1.9 | % | 1.8 | % |
In accordance with FASB ASC Topic 740, “Income Taxes,” our tax provision for income taxes decreased $0.1 million for the six months ending June 30, 2016 to $2.4 million compared to $2.5 million for the same period of the prior year. The provision for income taxes as a percentage of income before income taxes, or the effective tax rate was 38.9% for the six months ended June 30, 2016 compared to 39.1% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards.
Net Income
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2016 | Change $ | Change % | 2015 | 2016 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Income | $ | 3,818 | $ | 3,709 | $ | (109 | ) | (2.9 | )% | 3.0 | % | 2.8 | % |
We recognized net income of $3.7 million for the six month period ending June 30, 2016 compared to $3.8 million in the same period of the prior year. During this period, our operating income increased by $0.8 million due to a $3.2 million increase in net revenue that was offset with $2.4 million increase in operating expenses. Included in operating expenses are a $1.9 million gain from the sale of our Miami tower site and a $0.7 million impairment charge. We also recognized a $1.2 million increase in other expenses based on the change in the fair value of our interest rate swap agreement.
NON-GAAP FINANCIAL MEASURES
Management uses certain non-GAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements. We use these non-GAAP financial measures to evaluate financial results, develop budgets, manage expenditures and as a measure of performance under compensation programs.
Our presentation of these non-GAAP measures should not be considered as a substitute for or superior to the most directly comparable financial measures as reported in accordance with GAAP.
40 |
Item 10(e) of Regulation S-K defines and prescribes the conditions under which certain non-GAAP financial information may be presented in this report. We closely monitor EBITDA, Adjusted EBITDA, Station Operating Income (“SOI”), Digital media operating income, Publishing operating income, and free cash flow, all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful information about our core operating results, and thus, are appropriate to enhance the overall understanding of our financial performance. These non-GAAP measures are intended to provide management and investors a more complete understanding of our underlying operational results, trends and performance.
The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate SOI. We define SOI as net broadcast revenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have a direct impact on changes in SOI. SOI is not a measure of performance calculated in accordance with GAAP. SOI should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of GAAP. We believe that SOI is a useful non-GAAP financial measure to investors when considered in conjunction with operating income (the most directly comparable GAAP financial measure to SOI), because it is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment and communications industries. SOI is commonly used by investors and analysts who report on the industry to provide comparisons between broadcasting groups. We use SOI as one of the key measures of operating efficiency and profitability, including our internal reviews associated with impairment analysis of our indefinite-lived intangible assets. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and our income statement presents our financial performance prepared in accordance with GAAP. Our definition of SOI is not necessarily comparable to similarly titled measures reported by other companies.
We define same station net broadcast revenue as net broadcast revenue from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. We define same station broadcast operating expenses as broadcast operating expenses from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same station operating results include those stations we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same station operating results for a full calendar year are calculated as the sum of the same station-results for each of the four quarters of that year. We use same station operating results, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluations and management of the business. We believe that same station operating results provide a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming format. Our presentation of same station operating results are not intended to be considered in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition of same station operating results is not necessarily comparable to similarly titled measures reported by other companies.
We apply a similar methodology to our digital media and publishing group. Digital Media Operating Income is defined as net digital media revenue minus digital media operating expenses. Publishing Operating Income is defined as net publishing revenue minus publishing operating expenses. Digital Media Operating Income and Publishing Operating Income are not measures of performance in accordance with GAAP. Our presentations of these non-GAAP performance measures are not to be considered a substitute for or superior to our operating results reported in accordance with GAAP. We believe that Digital Media Operating Income and Publishing Media Operating Income are useful non-GAAP financial measures to investors, when considered in conjunction with operating income (the most directly comparable GAAP financial measure), because they are comparable to those used to measure performance of our broadcasting entities. We use this analysis as one of the key measures of operating efficiency, profitability and in our internal review. This measurement does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and our income statement presents our financial performance in accordance with GAAP. Our definitions of digital media operating income and publishing operating income are not necessarily comparable to similarly titled measures reported by other companies.
We define EBITDA as net income before interest, taxes, depreciation, amortization and change in fair value of interest rate swaps. We define Adjusted EBITDA as EBITDA before gains or losses on the sale or disposal of assets, changes in the estimated fair value of contingent earn-out consideration, impairment of long-lived assets, net miscellaneous income and expenses, and non-cash compensation expense. EBITDA and Adjusted EBITDA are commonly used by the broadcast and media industry as important measures of performance and are used by investors and analysts who report on the industry to provide meaningful comparisons between broadcasters. EBITDA and Adjusted EBITDA are not measures of liquidity or of performance in accordance with GAAP and should be viewed as a supplement to and not a substitute for or superior to our results of operations and financial condition presented in accordance with GAAP. Our definitions of EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures reported by other companies.
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We define free cash flow as Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash paid for interest. We consider free cash flow to be a performance measure that provides useful information to management and investors about the amount of cash generated by our operations after cash paid for capital expenditures, income taxes and interest. A limitation of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in our cash balance for the period. We use free cash flow, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluation and management of the business. Our presentation of free cash flow is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Our definition of free cash flow is not necessarily comparable to similarly titled measures reported by other companies.
For all non-GAAP measures, investors should consider the limitations associated with these metrics, including the potential lack of comparability of this measure from one company to another.
The tables below show the GAAP and non-GAAP performance indicators that we believe provide useful information to management and investors. We use non-GAAP measures to evaluate financial performance, develop budgets, manage expenditures, and determine employee compensation. Our presentation of this additional information is not to be considered as a substitute for or superior to the directly comparable measures reported in accordance with GAAP.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
GAAP and Non-GAAP Financial Measures | 2015 | 2016 | 2015 | 2016 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net Income | $ | 3,523 | $ | 3,356 | $ | 3,818 | $ | 3,709 | ||||||||
Station Operating Income | 13,873 | 13,998 | 26,495 | 26,481 | ||||||||||||
Same Station Operating Income | 13,881 | 14,012 | 26,514 | 26,563 | ||||||||||||
Digital Media Operating Income | 2,732 | 2,530 | 4,523 | 4,628 | ||||||||||||
Publishing Operating Income (loss) | 265 | (222 | ) | 294 | (350 | ) | ||||||||||
EBITDA | 13,629 | 13,868 | 23,799 | 24,077 | ||||||||||||
Adjusted EBITDA | 13,508 | 12,863 | 24,290 | 23,302 | ||||||||||||
Free Cash Flow | 7,470 | 6,492 | 12,696 | 11,088 |
In the table below, we present a reconciliation of same station net broadcast revenue to net broadcast revenue, the most comparable GAAP measure and same station broadcast operating expenses to broadcast operating expense, the most comparable GAAP measure. Our presentation of these non-GAAP performance indicators are not to be considered a substitute for or superior to the directly comparable measures reported in accordance with GAAP.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2015 | 2016 | 2015 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Reconciliation of Same Station Net Broadcast Revenue to Net Broadcast Revenue | ||||||||||||||||
Net broadcast revenue – same station | $ | 48,920 | $ | 48,970 | $ | 95,459 | $ | 96,661 | ||||||||
Net broadcast revenue – acquisitions | 93 | 711 | 93 | 1,491 | ||||||||||||
Net broadcast revenue – format change | 47 | 26 | 47 | 26 | ||||||||||||
Net broadcast revenue | $ | 49,060 | $ | 49,707 | $ | 95,599 | $ | 98,178 | ||||||||
Reconciliation of Same Station Broadcast Operating Expenses to Broadcast Operating Expenses | ||||||||||||||||
Broadcast operating expenses – same station | $ | 35,039 | $ | 34,958 | $ | 68,945 | $ | 70,098 | ||||||||
Broadcast operating expenses – acquisitions | 74 | 708 | 85 | 1,556 | ||||||||||||
Broadcast operating expenses – format change | 74 | 43 | 74 | 43 | ||||||||||||
Broadcast operating expenses | $ | 35,187 | $ | 35,709 | $ | 69,104 | $ | 71,697 | ||||||||
Reconciliation of Same Station Operating Income to Station Operating Income | ||||||||||||||||
Station operating income – same station | $ | 13,881 | $ | 14,012 | $ | 26,514 | $ | 26,563 | ||||||||
Station operating income (loss) – acquisitions | 19 | 3 | 8 | (65 | ) | |||||||||||
Station operating loss – format change | (27 | ) | (17 | ) | (27 | ) | (17 | ) | ||||||||
Station operating income | $ | 13,873 | $ | 13,998 | $ | 26,495 | $ | 26,481 |
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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES:
Reconciliation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) to Net Income | ||||||||||||||||
Station operating income | $ | 13,873 | $ | 13,998 | $ | 26,495 | $ | 26,481 | ||||||||
Digital media operating income | 2,732 | 2,530 | 4,523 | 4,628 | ||||||||||||
Publishing operating income (loss) | 265 | (222 | ) | 294 | (350 | ) | ||||||||||
Less unallocated corporate expenses | (3,518 | ) | (3,568 | ) | (7,509 | ) | (7,781 | ) | ||||||||
Less depreciation and amortization | (4,375 | ) | (4,171 | ) | (8,876 | ) | (8,306 | ) | ||||||||
Less change in the estimated fair value of contingent earn-out consideration | 307 | 134 | 189 | 262 | ||||||||||||
Impairment of long-lived assets | — | (700 | ) | — | (700 | ) | ||||||||||
Less gain (loss) on the sale or disposal of assets | (30 | ) | 1,701 | (159 | ) | 1,551 | ||||||||||
Operating income | $ | 9,254 | $ | 9,702 | $ | 14,957 | $ | 15,785 | ||||||||
Plus interest income | 2 | 2 | 3 | 3 | ||||||||||||
Less interest expense, net of capitalized interest | (3,874 | ) | (3,730 | ) | (7,678 | ) | (7,526 | ) | ||||||||
Less change in fair value of interest rate swaps | 444 | (423 | ) | (976 | ) | (2,181 | ) | |||||||||
Less loss on early retirement of long-term debt | — | (5 | ) | (41 | ) | (14 | ) | |||||||||
Less net miscellaneous income and expenses | — | — | 7 | — | ||||||||||||
Less provision for income taxes | (2,303 | ) | (2,190 | ) | (2,454 | ) | (2,358 | ) | ||||||||
Net income | $ | 3,523 | $ | 3,356 | $ | 3,818 | $ | 3,709 |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2016 | 2015 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Calculation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) | ||||||||||||||||
Net broadcast revenue | $ | 49,060 | $ | 49,707 | $ | 95,599 | $ | 98,178 | ||||||||
Less broadcast operating expenses | (35,187 | ) | (35,709 | ) | (69,104 | ) | (71,697 | ) | ||||||||
Station operating income | $ | 13,873 | $ | 13,998 | $ | 26,495 | $ | 26,481 | ||||||||
Net digital media revenue | $ | 11,499 | $ | 11,311 | $ | 22,290 | $ | 22,595 | ||||||||
Less digital media operating expenses | (8,767 | ) | (8,781 | ) | (17,767 | ) | (17,967 | ) | ||||||||
Digital media operating income | $ | 2,732 | $ | 2,530 | $ | 4,523 | $ | 4,628 | ||||||||
Net publishing revenue | $ | 6,734 | $ | 6,761 | $ | 11,260 | $ | 11,581 | ||||||||
Less publishing operating expenses | (6,469 | ) | (6,983 | ) | (10,966 | ) | (11,931 | ) | ||||||||
Publishing operating income (loss) | $ | 265 | $ | (222 | ) | $ | 294 | $ | (350 | ) | ||||||
Reconciliation of Free Cash Flow to Adjusted EBITDA to EBITDA to Net Income | ||||||||||||||||
Free Cash Flow | $ | 7,470 | $ | 6,492 | $ | 12,696 | $ | 11,088 | ||||||||
Plus cash paid for interest, net of capitalized interest | 3,559 | 3,552 | 7,071 | 7,099 | ||||||||||||
Plus cash paid for taxes | 312 | 191 | 316 | 60 | ||||||||||||
Plus net cash paid for capital expenditures (1) | 2,167 | 2,628 | 4,207 | 5,055 | ||||||||||||
Adjusted EBIDTA | $ | 13,508 | $ | 12,863 | $ | 24,290 | $ | 23,302 | ||||||||
Less non-cash stock-based compensation | (156 | ) | (125 | ) | (487 | ) | (324 | ) | ||||||||
Less net miscellaneous income and expenses | — | — | 7 | — | ||||||||||||
Less loss on early retirement of long-term debt | — | (5 | ) | (41 | ) | (14 | ) | |||||||||
Plus change in the estimated fair value of contingent earn-out consideration | 307 | 134 | 189 | 262 | ||||||||||||
Less impairment of long-lived assets | — | (700 | ) | — | (700 | ) | ||||||||||
Less gain (loss) on the sale or disposal of assets | (30 | ) | 1,701 | (159 | ) | 1,551 | ||||||||||
EBITDA | $ | 13,629 | $ | 13,868 | $ | 23,799 | $ | 24,077 | ||||||||
Plus interest income | 2 | 2 | 3 | 3 | ||||||||||||
Less depreciation and amortization | (4,375 | ) | (4,171 | ) | (8,876 | ) | (8,306 | ) | ||||||||
Less interest expense, net of capitalized interest | (3,874 | ) | (3,730 | ) | (7,678 | ) | (7,526 | ) | ||||||||
Less change in fair value of interest rate swaps | 444 | (423 | ) | (976 | ) | (2,181 | ) | |||||||||
Less provision for income taxes | (2,303 | ) | (2,190 | ) | (2,454 | ) | (2,358 | ) | ||||||||
Net income | $ | 3,523 | $ | 3,356 | $ | 3,818 | $ | 3,709 | ||||||||
(1) | Net cash paid for capital expenditures reflects actual cash payments net of amounts reimbursable for tenant improvements allowances. |
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CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Significant areas for which management uses estimates include:
· | asset impairments, including goodwill, broadcasting licenses and other indefinite-lived intangible assets; |
· | probabilities associated with the potential for contingent earn-out consideration; |
· | fair value measurements; |
· | contingency reserves; |
· | allowance for doubtful accounts; |
· | sales returns and allowances; |
· | barter transactions; |
· | inventory reserves; |
· | reserves for royalty advances; |
· | fair value of equity awards; |
· | self-insurance reserves; |
· | estimated lives for tangible and intangible assets; |
· | income tax valuation allowances; and |
· | uncertain tax positions. |
These estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we may consult outside experts to assist as considered necessary.
We believe the following accounting policies and the related judgments and estimates are critical accounting policies that affect the preparation of our condensed consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements.
Goodwill, Broadcast Licenses and Other Indefinite-Lived Intangible Assets
Approximately 71% of our total assets at June 30, 2016 consist of indefinite-lived intangible assets including broadcast licenses, goodwill and mastheads. The value of these indefinite-lived intangible assets depends significantly upon the operating results of our businesses. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired.
We believe that our estimate of the value of our broadcast licenses, mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our estimates incorporate variables and assumptions that are based on past experiences and judgment about future operating performance of our markets and business segments. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs discussed in detail in Note 14.
We perform our annual impairment testing during the fourth quarter of each year, which coincides with our budget and planning process for the upcoming year. During our annual testing in the fourth quarter of 2015, we recognized an impairment charge of $0.4 million associated with the value of goodwill in our Singing News Network (formerly Solid Gospel Network.). The impairments were driven by reductions in the projected net revenues of the Singing News Network and of continual declines in revenues from our print magazines that were not offset with cost reductions from the decrease in the number of publications printed. The growth of digital-only publications, which are often free or significantly less than a print magazine, has hindered the ability of the publishing industry to recover from the economic recession that began in 2008. We believe that the impairments are indicative of trends in the industry as a whole and are not unique to our company or operations.
We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our indefinite-lived intangible assets, however, these estimates and assumptions could be materially different from actual results. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our indefinite-lived intangible assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.
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Impairment of Long-Lived Assets
We account for property and equipment in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” We periodically review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. In accordance with authoritative guidance for impairment of long-lived assets, we must estimate the fair value of assets when events or circumstances indicate that they may be impaired. The fair value measurements for our long-lived assets use significant observable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material.
We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our long-lived assets, however, these estimates and assumptions could be materially different from actual results. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of long-lived assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.
Accounting for Acquisitions
We account for business acquisitions in accordance with the acquisition method of accounting as specified in FASB ASC Topic 805 “Business Combinations.” The total acquisition consideration is allocated to assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction. Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives based on historical experience, market trends and any synergies believed to be achieved from the acquisition. The excess of consideration paid over the estimated fair values of the net assets acquired is recorded as goodwill and any excess of fair value of the net assets acquired over the consideration paid is recorded as a gain on bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued.
Acquisitions may include contingent earn-out consideration, the fair value of which is estimated as of the acquisition date as the present value of the expected contingent payments as determined using weighted probabilities of the payment amounts.
A majority of our radio station acquisitions have consisted primarily of the FCC licenses to broadcast in a particular market. We often do not acquire the existing format, or we change the format upon acquisition when we find it beneficial. As a result, a substantial portion of the purchase price for the assets of a radio station is allocated to the broadcast license.
We may retain a third-party appraiser to estimate the fair value of the acquired net assets as of the acquisition date. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values to the various asset categories in our financial statements. These fair value estimates are subjective in nature and require careful consideration and judgment. Management reviews the third party reports for reasonableness of the assigned values. We believe that the purchase price allocations represent the appropriate estimated fair value of the assets acquired and we have not had to modify our purchase price allocations.
We estimate the economic life of each tangible and intangible asset acquired to determine the period of time in which the asset should be depreciated or amortized. A considerable amount of judgment is required in assessing the economic life of each asset. We consider our own experience with similar assets, industry trends, market conditions and the age of the property at the time of our acquisition to estimate the economic life of each asset. If the financial condition of the assets were to deteriorate, the resulting change in life or impairment of the asset could cause a material impact and volatility in our operating results. We have not experienced changes in the economic life established for each major category of our assets.
Accounting for Contingent Earn-Out Consideration
Our acquisitions often include contingent earn-out consideration as part of the purchase price. The fair value of the contingent earn-out consideration is estimated as of the acquisition date based on the present value of the contingent payments expected to be made using a weighted probability of possible payments. The unobservable inputs used in the determination of the fair value of the contingent earn-out consideration include our own assumptions about the likelihood of payment based on the established benchmarks and discount rates based on our internal rate of return analysis. The fair value measurement includes inputs that are Level 3 measurement as discussed in Note 14.
We review the probabilities of possible future payments to the estimated fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results increase or decrease as compared to the assumption used in our analysis, the fair value of the contingent earn-out consideration obligations will increase or decrease, up to the contracted limit, as applicable. Changes in the fair value of the contingent earn-out consideration could cause a material impact and volatility in our operating results. We recorded a net decrease to our estimated contingent earn-out liabilities of $0.2 million during the six months ending June 30, 2016 and 2015. The changes in our estimates reflect volatility from variables, such as revenue growth, page views and session time as discussed in Note 5 – Contingent Earn-Out Consideration.
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We believe that we have used reasonable estimates and assumptions to calculate the estimated fair value of all remaining contingent earn-out consideration.
Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” established a single definition of fair value in generally accepted accounting principles and requires expanded disclosure requirements about fair value measurements. The provision applies to other accounting pronouncements that require or permit fair value measurements. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations; (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairment testing; (iii) other nonfinancial assets measured at fair value in conjunction with impairment assessments; and (iv) asset retirement obligations initially measured at fair value.
The fair value provisions include guidance on how to estimate the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market, and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less (or no) pricing observability and a higher degree of judgment utilized in measuring fair value.
FASB ASC Topic 820 established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the FASB ASC Topic 820 hierarchy are as follows:
• | Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date; |
• | Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and |
• | Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data). |
We believe that we have used reasonable estimates and assumptions to calculate the estimated fair value of our financial assets as discussed in Note 14.
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Contingency Reserves
In the ordinary course of business, we are involved in various legal proceedings, lawsuits, arbitration and other claims that are complex in nature and have outcomes that are difficult to predict. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. Certain of these proceedings are discussed in Note 16, Commitments and Contingencies.
We record contingency reserves to the extent we conclude that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The establishment of the reserve is based on a review of all relevant factors, the advice of legal counsel, and the subjective judgment of management. The reserves we have recorded to date, including $0.5 million as of the period ending June 30, 2016, have not been material to our condensed consolidated financial position, results of operations or cash flows. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
While we believe that the final resolution of any known maters, individually and in the aggregate, will not have a material adverse effect upon our condensed consolidated financial position, results of operations or cash flows, it is possible that we could incur additional losses. We maintain insurance that may provide coverage for such matters. Future claims against us, whether meritorious or not, could have a material adverse effect upon our condensed consolidated financial position, results of operations or cash flows, including losses due to costly litigation and losses due to matters that require significant amounts of management time that can result in the diversion of significant operational resources.
Allowance for Doubtful Accounts
We evaluate the balance reserved in our allowance for doubtful accounts on a quarterly basis based on our historical collection experience, the age of the receivables, specific customer information and current economic conditions. Past due balances are generally not written-off until all of our collection efforts have been unsuccessful, including use of a collections agency. A considerable amount of judgment is required in assessing the likelihood of ultimate realization of these receivables, including the current creditworthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Sales Returns and Allowances
We provide for estimated returns for products sold with the right of return, primarily book sales associated with Regnery Publishing and nutritional products sold through Eagle Wellness and Gene Smart. We record an estimate of these product returns as a reduction of revenue in the period of the sale. Our estimates are based upon historical sales returns, the amount of current period sales, economic trends and any changes in customer demand and acceptance of our products. We regularly monitor actual performance to estimated return rates and make adjustments as necessary. Estimated return rates utilized for establishing estimated returns reserves have approximated actual returns experience. However, actual returns may differ significantly, either favorably or unfavorably, from these estimates if factors such as the historical data we used to calculate these estimates do not properly reflect future returns or as a result of changes in economic conditions of the customer and/or the market. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Barter Transactions
We may provide broadcast time or digital advertising placement to customers in exchange for certain products, supplies or services. The terms of these exchanges generally permit for the preemption of such broadcast time or digital placements in favor of customers who purchase these items for cash. We include the value of such exchanges in net revenues and operating expenses. The value recorded for barter revenue and barter expense is based upon management’s estimate of the fair value of the products, supplies or services received. We believe that our estimates and assumptions are reasonable and that our barter revenue and barter expense are accurately reflected.
We record barter revenue as it is earned, typically when the broadcast time is used or the digital advertisement is delivered. We record barter expense equal to the estimated fair value of the goods or services received upon receipt or usage of the items as applicable. Barter advertising revenue included in broadcast revenue for the three and six months ended June 30, 2016 was approximately $1.4 million and $2.4 million, respectively, and $1.4 million and $3.1 million, respectively, for the same period of the prior year. Barter expenses included in broadcast operating expense for the three and six months ended June 30, 2016 was approximately $1.4 million and $2.4 million, respectively, and $1.3 million and $2.9 million, respectively, for the same period of the prior year.
Inventory Reserves
Inventories consist of finished goods, including published books and wellness products. Inventory is recorded at the lower of cost or market as determined on a First-In First-Out (“FIFO”) cost method. We reviewed historical data associated with book and wellness product inventories held by Regnery Publishing and our e-commerce wellness entities, as well as our own experiences to estimate the fair value of inventory on hand. Our analysis includes a review of actual sales returns, our allowances, royalty reserves, overall economic conditions and product demand. We record a provision to expense the balance of unsold inventory that we believe to be unrecoverable. We regularly monitor actual performance to our estimates and make adjustments as necessary. Estimated inventory reserves may be adjusted, either favorably or unfavorably, if factors such as the historical data we used to calculate these estimates do not properly reflect future returns or as a result of changes in economic conditions of the customer and/or the market. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
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Reserves for Royalty Advances
Royalties due to book authors are paid in advance and capitalized. Royalties are expensed as the related book revenues are earned or when we determine that future recovery of the royalty is not likely. We reviewed historical data associated with royalty advances, earnings and recoverability based on actual results of Regnery Publishing. Historically, the longer the unearned portion of an advance remains outstanding, the less likely it is that we will recover the advance through the sale of the book. We apply this historical experience to outstanding royalty advances to estimate the likelihood of recovery. A provision was established to expense the balance of any unearned advance which we believe is not recoverable. Our analysis also considers other discrete factors, such as death of an author, any decision to not pursue publication of a title, poor market demand or other relevant factors. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Fair Value of Equity Awards
We account for stock-based compensation under the provisions of FASB ASC Topic 718, “Compensation—Stock Compensation.” We record equity awards with stock-based compensation measured at the fair value of the award as of the grant date. We determine the fair value of our options using the Black-Scholes option-pricing model that requires the input of highly subjective assumptions, including the expected stock price volatility and expected term of the options granted. The exercise price for options is equal to the closing market price of Salem Media Group Inc. common stock as of the date of grant. We use the straight-line attribution method to recognize share-based compensation costs over the expected service period of the award. Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock awards, deferred tax assets for options and restricted stock awards with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each vesting period was a separate award. We have not modified our estimates or assumptions. We believe that our estimates and assumptions are reasonable and that our stock-based compensation is accurately reflected in our results of operations.
Partial Self-Insurance on Employee Health Plan
We provide health insurance benefits to eligible employees under a self-insured plan whereby the company pays actual medical claims subject to certain stop loss limits. We record self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but not reported. Our estimates are based on historical data and probabilities. Any projection of losses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should the actual amount of claims increase or decrease beyond what was anticipated, we may adjust our future reserves. Our self-insurance liability was $0.6 million and $0.7 million at June 30, 2016 and December 31, 2015, respectively. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Income Tax Valuation Allowances (Deferred Taxes)
For financial reporting purposes, we recorded a valuation allowance of $2.8 million as of June 30, 2016 and December 31, 2015 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. We regularly review our financial forecasts in an effort to determine our ability to utilize the net operating loss carryforwards for tax.
Income Taxes and Uncertain Tax Positions
We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.” We recorded no adjustments to our unrecognized tax benefits as of June 30, 2016 and 2015. At December 31, 2015, we had $0.1 million in liabilities for unrecognized tax benefits. Included in this liability amount is approximately $20,000 of accrued interest, net of federal income tax benefits, and $6,000 for the related penalties recorded in income tax expense on our Condensed Consolidated Statements of Operations. We expect to reduce the reserve balance to zero over the next twelve months due to statute expirations.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded, and will continue to fund, expenditures for operations, administrative expenses, and capital expenditures from operating cash flow, borrowings under credit facilities and, if necessary, proceeds from the sale of selected assets or businesses. We have historically financed acquisitions through borrowings, including borrowings under credit facilities and, to a lesser extent, from operating cash flow and from proceeds on selected asset dispositions. We expect to fund future acquisitions from cash on hand, borrowings under our credit facilities, operating cash flow and possibly through the sale of income-producing assets or proceeds from debt and equity offerings. We believe that the borrowing capacity under our current credit facilities allows us to meet our ongoing operating requirements, fund capital expenditures and satisfy our debt service requirements for at least the next twelve months.
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The balance of our cash and cash equivalents decreased to $44,000 as of June 30, 2016 as compared to $0.1 million as of December 31, 2015. Working capital increased $1.0 million to $14.1 million as of June 30, 2016 compared to $13.1 million as of December 31, 2015.
Operating Cash Flows
Our largest source of operating cash inflows are receipts from customers in exchange for advertising and programming. Other sources of operating cash inflows include cash receipts from customers for digital downloads and streaming, book sales, subscriptions, ticket sales, sponsorships, and vendor promotions. A majority of our operating cash outflows consist of payments to employees, such as salaries and benefits, and vendor payments under facility and tower leases, talent agreements, inventory purchases and recurring services such as utilities and music license fees.
Net cash provided by operating activities during the six month period ending June 30, 2016 increased by $3.8 million to $19.7 million compared to $15.9 million during the same period of the prior year. The increase in cash provided by operating activities includes the impact of the following items:
· | Net income decreased to $3.7 million compared to $3.8 million for the same period of the prior year; |
· | Net accounts receivable decreased $2.9 million; |
· | Our Day’s Sales Outstanding, or the average number of days to collect cash from the date of sale, decreased to 62 days at June 30, 2016 compared to 67 days for the same period of the prior year; |
· | Net accounts payable and accrued expenses decreased $2.2 million to $14.3 million for the six months ended June 30, 2016 compared to an increase of $0.8 million to $16.5 million for the same period of the prior year; and |
· | Net inventories on hand slightly decreased to $0.9 million at June 30, 2016 compared to a $0.3 million decrease to $0.9 million for the same period of the prior year. |
Investing Cash Flows
Our primary source of investing cash inflows includes proceeds from the sale or disposal of assets or businesses. Our investing cash outflows include cash payments made to acquire businesses, to acquire property and equipment and to acquire intangible assets such as domain names. While our focus continues to be on deleveraging the company, we remain committed to explore and pursue strategic acquisitions.
In recent years, our acquisition agreements have contained contingent earn-out arrangements that are payable in the future based on the achievement of predefined operating results. We believe that these contingent earn-out arrangements provide some degree of protection with regard to our cash outflows should these acquisitions not meet our operational expectations.